THE 

PRINCIPLE?,,-,,..      : 

OF 

SURETY  UNDERWRITING 

with  Annotations 

Giving  the  Law  of  the  Several  States  on 
Important  Points 

BY 

LUTHER  E.  MACKALL,  A.  B.,  LL.  B. 

^ 

Counsel  for  the  Surety  Department  of  the 

Globe  Indemnity  Company 
and  a  member  of  its  Underwriting  Committee 


1914 


THOMAS    A    EVANS    PRINTING    CO\ 

PUBLISHERS, 

217-219    GUILFORD    AVE, 

BALTIMORE.    MDi 


COPYRIGHTED   1914 
BY  LUTHER  E.   MACKALL 


PREFACE. 

The  need  of  a  book  dealing  comprehensively  with 
the  problems  of  surety  underwriting  has  long  been 
felt  by  surety  men ;  and  since  no  one  else  seemed  willing 
to  undertake  the  task  of  supplying  this  need,  I  have 
made  the  attempt,  and  submit  the  result  to  the  surety 
fraternity  with  the  hope  that  it  may  be  useful.  I  have 
tried  to  make  it  serve  the  two-fold  purpose,  first,  of 
affording  a  convenient  means  whereby  those  who  are  un- 
familiar with  the  business  may  learn  the  fundamental 
principles  of  underwriting,  so  that  they  may  have  the 
foundation  upon  which  to  comprehend,  interpret  and 
apply  the  underwriting  policy  of  their  respective  com- 
panies, and,  second,  of  affording  a  convenient  reference 
book  for  the  more  experienced  underwriters,  so  that 
they  may  refresh  their  memories  on  points  or  details 
that  may  be  obscure,  and  obtain  exact  information  as  to 
the  law  of  the  several  States  on  important  points. 

This  is  a  broad  subject  and  the  information  pertaining 
to  it  has  never  been  put  in  available  form;  but  for- 
tunately I  have  not  been  compelled  to  rely  entirely 
upon  my  own  observation,  experience  and  study,  but 
have  had  the  benefit  of  much  of  the  statistics  that  have 
been  gathered  by  the  companies  from  their  claim  files 
and  have  had  the  privilege  of  consulting  some  of  the 
foremost  underwriters  in  the  business;  and  I  desire 


843634 


4  THE  PRINCIPLES  OF  SURETY  UNDERWRITING. 

especially  to  acknowledge  my  indebtedness  to  E.  K.  Wil- 
son, Esq.,  Attorney  in  Charge  of  the  Legal  Department 
of  the  American  Bonding  Company  of  Baltimore ;  Alex- 
ander Coulter,  Esq.,  Manager  of  the  Public  Official  and 
Depository  Department  of  the  Fidelity  and  Deposit 
Company  of  Maryland;  Millard  Leonard,  Esq.,  Super- 
intendent of  the  Judicial  Department  of  the  same  com- 
pany ;  and  W.  B.  Wood,  Esq.,  Engineer  of  the  same  com- 
pany; and  E.  E.  Kolb,  Esq.,  Superintendent  of  the 
Fidelity  Department  of  the  Maryland  Casualty  Com- 
pany. 


LUTHER  E.  MACKALL. 


New  York,  April  27,  1914. 


TABLE  OF  CONTENTS. 

Chapter  I— Fidelity  Bonds. 

1.  Scope. 

2.  The  liability  under  fidelity  bonds. 

3.  Termination  of  Liability. 

4.  The  underwriting  of  fidelity  bonds. 

5.  The  personality  of  the  applicant.     Antece- 

dents and  environments. 

6.  Habits. 

7.  Financial  condition. 

8.  The  investigation. 

9.  The  nature  of  the  position.    In  general. 

10.  Opportunities.     The  amount  of  money  to 

be  handled. 

11.  Extent  of  control  over  employer's  money. 

12.  Opportunity  to  conceal  shortage. 

13.  Temptations.    In  general. 

14.  Inadequate  compensation. 

15.  Where  amount  of  compensation  varies. 

16.  Lack  of  power  in  the  State  to  punish  a 

defaulter. 

17.  Liabilities  of  employee.    In  general. 

18.  Liability  for  stock  shortage. 

19.  Liability  for  uncollected  accounts. 

Chapter  II— Public  Official  Bonds. 

20.  Scope. 

21.  Form  of  bond  and  liability  in  general. 

22.  Termination  of  liability. 

23.  The  underwriting  of  public  official  bonds. 


TABLE  OF  CONTENTS. 

24.  The  personality  of  the  applicant.    In  general. 

25.  Honesty. 

26.  Efficiency. 

27.  Financial  resources. 

28.  The  nature  of  the  office.    In  general. 

29.  Opportunities,   temptation   and  liabilities. 

In  general. 

30.  The  amount  of  money  to  be  handled. 

31.  The  system  of  checks. 

32.  Ease  or  difficulty  of  concealing  shortage. 

33.  Frequency  and  efficiency  of  audits. 

34.  Where  applicant  held  the  office  during 

the  preceding  term. 

35.  Liabilities — for  loss  by  bank  failure. 

36.  Defaults  by  subordinates. 

37.  Loss  by  burglary,  theft  or  larceny. 

38.  Liability  for  interest  derived  from  public 

funds. 

39.  Neglect  or  malfeasance  of  official  duty. 

40.  Acts  in  excess  of  authority. 

Chapter  III.    Court  Bonds— Fiduciaries. 

41.  Scope. 

42.  Executors  and  administrators. 

43.  Administrators  de  bonis  non. 

44.  Administrators  cum  testamento  annexo. 

45.  Administrators    cum    testamento    annexo    de 

bonis  non. 

46.  Temporary  or  special  administrators  or  admin- 

istrators pendente  lite. 


TABLE  OF  CONTENTS.  7 

47.  Trustees. 

48.  Trustees,  guardians  and  administrators  to  sell 

property. 

49.  Receivers. 

50.  Receivers  and  trustees  in  bankruptcy. 

51.  Assignees  for  the  benefit  of  creditors. 

52.  Guardians  and  tutors  of  minors. 

53.  Committee,  conservator  or  curator. 

54.  The  underwriting  of  bonds  of  fiduciaries. 

55.  The  personality  of  the  applicant. 

56.  As  affected  by  the  standing  of  his  attorney. 

57.  The  nature  of  the  position.    In  general. 

58.  Opportunity    for    misappropriation — joint 

control. 

59.  Duties  and  liabilities.    In  general. 

60.  Possession  of  the  trust  property. 

61.  Filing  of  inventory. 

62.  Conversion  of  estate  into  proper  form. 

63.  Payment  of  debts. 

64.  Investment  of  funds. 

65.  Care  of  the  trust  property. 

66.  Trust  property  to  be  kept  separate  and 

ear-marked. 

67.  Money  to  be  kept  under  exclusive  con- 

trol.    The  effect  of  joint  control  by 
surety. 

68.  Periodical  accounting. 

69.  Distribution  of  estate. 

70.  Liability  of  surety  for  debts  due  by  fidu- 

ciary. 

71.  Liability  for  acts  in  excess  of  authority.   ' 


TABLE  OF  CONTENTS. 

72.  The  exercising  of  joint  control  by  surety. 

73.  Substituted  surety. 

74.  Termination  of  liability. 

Chapter  IV.    Court  Bonds— Credit  Guarantees. 

75.  Scope. 

76.  The  underwriting  of  judicial  credit  guarantees. 

77.  Appeal  or  supersedeas  bonds. 

78.  Bonds  for  costs. 

79.  Attachment  bond. 

80.  Bond  to  dissolve  an  attachment. 

81.  Injunction  bond. 

82.  Bond  to  dissolve  an  injunction. 

83.  Replevin  bonds. 

84.  Re-delivery  bond  in  replevin. 

85.  Bond  in  case  of  a  distraint  for  rent. 

86.  Bond  to  release  a  distraint. 

87.  Indemnity  bonds  to  sheriff  or  marshal.     In 

releasing  property. 

88.  Indemnity  bonds  to  sheriff  or  marshal.     In 

seizing  property. 

89.  Libellant's  bond  in  admirality. 

90.  Bond  to  release  a  libel  or  a  stipulation  for 

value. 

91.  Bond  of  applicant  for  the  appointment  of  a 

receiver. 

92.  Bond  for  petitioning  creditors  in  bankruptcy. 

93.  Removal  bonds. 

94.  Bond  on  order  of  arrest. 

95.  Bail  bonds. 


TABLE  OF  CONTENTS.  9 

96.  Bond  on  sale  of  real  estate  of  a  deceased  per- 

son before  expiration  of-  time  for  filing 
claims. 

97.  Bond  for  legatee  to  pay  debts  of  testator. 

98.  Fiduciaries  as  applicants  for  bond  in  judicial 

proceedings. 

99.  Municipalities  as  applicants  for  bond  in  judi- 

cial proceedings. 

Chapter  V.    Contract  Bonds. 

100.  Scope. 

101.  The  underwriting  of  bid  bonds. 

102.  The  underwriting  of  construction  bonds. 

103.  The  personality  of  the  contractor. 

104.  Honesty  and  good  intentions. 

105.  Ability  and  experience. 

106.  Plant  and  equipment. 

107.  Financial  resources. 

108.  The  amount  of  work  on  hand. 

109.  The  nature  of  the  contract. 

110.  Adequacy  of  contract  price. 

111.  Payment  of  contract  price. 

112.  Time  for  completion. 

113.  Liability  in  case  of  destruction  of  building 

by  fire,  or  other  cause  during  construc- 
tion. 

114.  Liability  for  personal  injuries. 

115.  Liability  of  surety  for  labor  and  materials. 

116.  Limitations  of  liability  by  conditions  in  the 

bond. 


10  TABLE  OF  CONTENTS. 

117.  Where  contract  antedates  the  applicaiton 

for  the  bond. 

118.  The  underwriting  of  supply  contract  bonds. 

119.  The  underwriting  of  maintenance  bonds. 

Chapter  VI.    Depository  Bonds. 

120.  Scope. 

121.  The  underwriting  of  depository  bonds. 

122.  Financial  condition  of  applicant. 

123.  Liabilities — capital  and  surplus. 

124.  Deposits. 

125.  Borrowed  money. 

126.  The  assets. 

127.  Convertibility  of  assets  into  cash. 

128.  Cash  reserve. 

129.  Character  of  the  management. 

130.  Character  of  the  contract. 

131.  Liability — as  affected  by  right  to  salvage. 

132.  Liability — as  affected  by  the  right  to  cancel 

the  bond. 

133.  The  amount  of  liability  to  be  taken. 

Chapter  VII.    Indemnity  on  lost  instruments. 

134.  Scope. 

135.  Liability. 

136.  The  Bisk.     In  general. 

137.  As  affected  by  the  personality  of  the  appli- 

cant. 


TABLE  OF  CONTENTS.  11 

138.  As  affected  by  the  probable  destruction  of  the 

instrument. 

139.  As  affected  by  the  character  of  the  instru- 

ment. 

140.  Summary. 

Chapter  VDI.    Bond  on  Assignment  of  Accounts  Re- 
ceivable. 

141.  Scope. 

142.  Opportunity. 

143.  Temptation. 

144.  The  personality  of  the  applicant. 

145.  Summary. 

Chapter  IX.    Bonds  for  Insurance  Companies. 

146.  Scope. 

147.  Liability,  when  it  accrues. 

148.  Liability,  extent  of,  in  general. 

149.  Liability,  as  affected  by  the  time  covered  by  the 

bond. 

150.  Summary. 

Chapter  X.    Miscellaneous  Credit  Guarantees. 

151.  In  general. 

152.  Bond  to  discharge  a  mechanic's  lien. 

153.  Bonds  for  the  payment  of  rent. 

154.  Bond  to  produce  bill  of  lading  and  pay  freight 

charges. 

155.  Patent  Infringement  bonds. 


12  TABLE  OF  CONTENTS. 

156.  Bond  to  guarantee  payment  for  merchandise 

to  be  delivered  in  the  future. 

157.  Bond  of  mortgagor  to  make  improvements  on 

mortgaged  premises. 

158.  Franchise  bonds. 

159.  License  or  permit  bonds. 

160.  Refunding  bonds. 

161.  Bond  for  deportation  of  immigrants. 

162.  Bond  of  indemnity  against  immigrant  becom- 

ing a  public  charge. 

Chapter  XI.    Internal  Revenue  Bonds. 

163.  Scope. 

164.  Distillers'  bonds. 

165.  Fruit  distillers'  bonds. 

166.  Transportation  and  warehousing  bonds. 

167.  Bond   of  proprietor   of   a   general   or   special 

bonded  warehouse. 

168.  Bond  for  exportation  of  distilled  spirits. 

169.  Bond  for  withdrawal  of  distilled  spirits  free  of 

tax  under  Section  3464  R.  S. 

170.  Bond  for  the  withdrawal  of  alcohol  free  of 

tax  under  Section  3297,  R.  S. 

171.  Denatured  alcohol  bonds.     In  general. 

172.  Distillers'  denaturing  warehouse  bond  (Form 

572). 

173.  Bond  for  central  denaturing  bonded  warehouse 

(Form  611). 

174.  Industrial  distillers'  bond  (Form  614). 


TABLE  OF  CONTENTS.  13 

175.  Transportation    and    storeroom    bond    (Form 

653). 

176.  Manufacturers'  bond  for  specially  denatured 

alcohol  (Form  582). 

177.  Brewer's  bond. 

178.  Bond  for  the  exportation  of  fermented  liquors. 

179.  Bond  for  exportation  of  specific  merchandise 

under  the  Internal  Revenue  Laws. 

180.  Cigar  manufacturer's  bond. 

181.  Tobacco  manufacturer's  bond. 

182.  Tobacco  peddler's  bond. 


Chapter  XII.    Custom  House  Bonds. 

183.  In  general. 

184.  Warehousing  bonds. 

185.  Bond  for  Warehouse. 

186.  Bond  for  storage  of  Imported  Tea. 

187.  Bond  for  exportation  of  impure  and  unwhole- 

some tea. 

188.  Transportation  bond. 

189.  Bond  for  transportation  and  exportation. 

190.  Bond  of  Carriers  for  transportation  of  mer- 

chandise in  bond. 

191.  Bond  for  Cartmen,  Draymen  and  Lightermen. 

192.  Bond  for  redelivery. 

193.  Bond  on  importation  of  animals  for  exhibition. 

194.  Bond  for  exhibition  of  works  of  art. 

195.  Lay  Order  permit  bond  or  bond  for  the  loading 

and  unloading  of  vessels  at  night. 


14  TABLE  OF  CONTENTS. 

196.  Bond  for  redelivery  of  unexamined  packages. 

197.  Bond  on  export  of  imported  merchandise  with 

benefit  of  drawback. 

198.  Bond  for  examination  and  appraisement  of  ma- 

chinery at  destination. 

199.  Miscellaneous  Custom  House  bonds. 

Chapter  XIII.    Indemnity  to  Surety. 

200.  Scope. 

201.  The  unreliability  of  personal  indemnity. 

202.  When  bonds  may  be  issued  on  the  strength  of 

personal  indemnity. 

203.  The  enforceability  of  personal  indemnity. 

204.  The  preparation  and  execution  of  indemnity 

bonds. 


INTRODUCTION. 

Personal  suretyship,  though  one  of  the  oldest  insti-  Concerning 

Personal 

tutions  of  the  human  race,  has  always  been  very  unsat-  suretyship, 
isfactory.    It  is  unsatisfactory  because,  on  the  one  hand, 
those  who  become  sureties  rarely  receive  any  poinpeusa-; 
tion  for  so  doing,  and  nevertheless  are  often,  compelled  ° 
to  answer  for  a  default  of  their  principals  \t an&,  JHj.jtJze',, 
other,  because  the  sureties  are  often  found,  upon  de- 
fault of  their  principals,  to  be  insolvent,  so  that  real 
protection  is  not  afforded  to  those  who  are  entitled  to 
protection. 

It  seems  to  have  been  about  the  middle  of  the  last  origin  and 

,  .   .  .     ,.    .  T       ,  ,  Growth  of 

century  when  some  enterprising  individuals,  whose  corporate 
names  have  not  been  handed  down  to  posterity,  realiz- 
ing the  disadvantages  of  personal  suretyship,  conceived 
the  idea  of  forming  a  corporation  for  the  purpose  of 
going  into  the  business  of  becoming  surety  on  bonds  and 
charging  a  fee  for  the  service;  for  in  the  year  1865  the 
Legislature  of  the  State  of  New  York,  by  Chapter  328 
of  the  Acts  of  that  year,  authorized  the  formation  of  cor- 
porations to  guarantee  the  fidelity  of  persons  holding 
places  of  public  or  private  trust.  No  doubt  some  peo- 
ple were  at  that  time  desirous  of  forming  a  corporation 
for  that  purpose;  and  it  may  be  that  such  a  company 
was  actually  formed.  But  the  first  American  company 
that  ever  actually  transacted  the  business  of  suretyship 
in  this  country  was  the  Fidelity  and  Casualty  Company 
of  New  York,  which  was  incorporated  in  1876  and  be- 
gan business  in  1879.  The  business  of  this  company, 
like  that  of  the  Guarantee  Company  of  North  America, 
an  earlier  Canadian  corporation,  did  not  at  first  extend 


16  INTRODUCTION. 

beyond  the  guaranteeing  of  the  fidelity  of  persons  in 
positions  of  private  trust,  as  the  law  did  not  then 
authorize  the  acceptance  of  such  companies  as  surety  011 
bond  required  by  law  to  be  given.  However,  in  the  year 
1881  the  Legislature  of  New  York,  by  Chapter  486  of 
tbe^<5t?  of  that  year,  authorized  any  head  of  depart- 
vEient,  surrogate,  judge,  sheriff,  district  attorney  or  any 
'  other  iem"cer- who  was  required  to  approve  the  sufficiency 
of  any  bond,  in  his  discretion,  to  accept  the  same  when- 
ever the  conditions  of  such  bond  were  guaranteed  by  a 
company  authorized  to  guarantee  the  fidelity  of  persons 
holding  positions  of  public  or  private  trust. 

In  1884  the  American  Surety  Company  of  New 
York  was  formed,  and  that  Company  issued  bonds  to 
guarantee  the  fidelity  not  only  of  private  employees,  but 
also  of  executors,  administrators,  guardians,  trustees  and 
other  fiduciaries.  In  1890  the  Fidelity  and  Deposit 
Company  of  Maryland  was  formed,  and  that  company 
still  further  broadened  the  scope  of  the  business  to  in- 
clude bonds  of  public  officers.  In  the  next  few  years, 
in  view  of  the  very  successful  operation  of  the  American 
Surety  Company  of  New  York  and  the  Fidelity  and  De- 
posit Company  of  Maryland,  half  a  dozen  other  compa- 
nies were  formed,  and  now  there  are  actively  operating 
throughout  this  country  about  twenty-five  companies 
with  an  aggregate  premium  income  of  something  like 
$25,000,000  annually. 

American  surety  companies  are  operating  not  only 
in  every  state,  county,  city  and  village  in  the  United 
States,  but  also  in  several  foreign  countries,  including 
England,  the  principal  European  countries,  South 
America,  Cuba,  Porto  Kico  and  the  Philippines.  In  all 


INTRODUCTION.  17 

the  States  the  law  has  been  so  changed  as  to  permit 
the  acceptance  of  duly  accredited  surety  "companies  as 
sole  surety  on  all  bonds  required  by  law  to  be  given, 
and  the  corporate  surety  is  rapidly  taking  the  place  for- 
merly occupied  by  the  personal  surety. 

Suretyship  presupposes  the  existence  of  a  primary  The  Nature  of 

Suretyship. 

obligation;  and  the  undertaking  of  the  surety  is  that 
the  primary  obligor,  or  principal,  will  perform  that  ob- 
ligation. The  undertaking  is  usually  in  the  form  of  a 
bond  of  both  the  principal  and  surety  for  the  payment 
of  a  definite  sum  of  money  upon  condition  that  if  the 
principal  shall  perform  the  obligation,  the  bond  shall 
be  void.  However,  in  case  of  default  the  bond  will  be 
satisfied  by  the  payment  of  the  resulting  monetary 
damage,  not  exceeding  in  any  event  the  amount  of 
the  bond ;  and  the  principal  is  bound,  to  the  extent 
of  his  resources,  to  pay  that  damage  or  to  reimburse 
the  surety  in  case  the  surety  should  pay  it.  It  is  how- 
ever, the  practice  of  surety  companies  to  require  all 
applicants  to  execute  an  express  undertaking  to  in- 
demnify the  surety  not  only  against  loss  but  also 
against  all  costs,  expenses  and  counsel  fees. 

Suretyship  is  like  insurance  (other  than  life  in-  ^n^ance. Wlth 
surance),  in  that  its  purpose  is  to  indemnify  against  loss 
upon  the  happening  of  an  uncertain  contingency,  name- 
ly, the  default  of  the  principal.  The  underlying  theory 
of  the  business  of  suretyship  is  however  different  from 
that  of  insurance.  An  insurance  company,  though 
formed  for  profit,  is  essentially  a  medium  through  which 
a  large  number  of  persons  co-operate  together  and  pay 
in  a  certain  sum  periodically  to  take  care  of  all  their 


18 


INTRODUCTION. 


Importance  of 
Making  a 
Proper 
Selection  of 
Risks. 


losses  from  the  happening  of  a  named  contingency, — the 
theory  being  that  a  certain  average  of  losses  is  bound 
to  occur,  and  that  those  losses,  if  borne  by  the  few  upon 
whom  they  fall,  may  ruin  them,  but  if  distributed 
among  a  large  number,  will  work  no  particular  injury. 
And  inasmuch  as  it  is  not  known  upon  whom  the  losses 
will  fall,  each  one  is  willing  to  contribute  a  small  sum 
for  protection  in  case  he  is  one  of  the  unfortunate  ones. 

The  business  of  a  surety  company,  on  the  other 
hand,  is  to  sell  to  those  who  are  in  need  of  a  surety 
the  use  of  its  name  and  credit  for  that  purpose, — the 
theory  being,  not  so  much  that  if  a  large  amount  of 
business  is  written  the  premiums  will  take  care  of  the 
losses,  as  that  only  those  who  are  able  and  willing 
to  fulfill  their  obligations  will  be  bonded,  so  that  there 
will  be  no  losses.  The  premium  is  considered  as  a  re- 
ward to  the  company  for  the  use  of  its  name  and  credit. 

Insurance  deals  with  conditions;  suretyship,  with 
individuals.  Insurance  protects  against  loss  from  the 
happening  of  a  contingency  which  is,  in  a  large  measure, 
beyond  the  control  of  either  of  the  contracting  parties ; 
suretyship  protects  against  loss  from  the  default  of  a 
particular  person,  who  is  the  primary  obligor.  In- 
surance assumes  that  a  certain  average  of  losses  will 
occur,  and  a  premium  is  paid  to  compensate  for  those 
losses;  suretyship,  on  the  contrary,  assumes  that  each 
primary  obligor  will  perform  his  obligation,  and  that 
there  will  be  no  losses. 

While  it  is  theoretically  possible  for  a  surety  com- 
pany to  become  surety  only  for  those  who  are  able  and 
willing  to  perform  their  obligations,  yet,  in  practice, 


INTRODUCTION.  19 

losses  do  occur.  This  is  so  because,  in  the  first  place, 
those  whose  duty  it  is  to  select  the  person  to  be  bonded, 
have  human  limitations  and  cannot  exercise  an  in- 
fallible judgment.  In  the  second  place,  the  great  ma- 
jority of  risks  are  neither  so  obviously  safe  that  it  can  be 
stated  positively  that  no  loss  will  result,  nor  so  bad  that 
it  can  be  said  that  loss  will  certainly,  or  even  likely, 
occur.  In  order  for  a  company  to  do  a  substantial 
volume  of  business,  some  of  these  doubtful  risks  have 
to  be  taken,  and  the  problem  is  to  select  such  as  are 
reasonably  safe. 

In  order  to  hold  the  balance  between  the  desirable 
and  the  undesirable  risks,  and  to  make  a  reasonably 
careful  selection,  without,  at  the  same  time,  unduly 
restricting  the  business,  it  is  necessary,  in  each  case,  to 
understand  the  extent  and  character  of  the  obligation 
that  is  to  be  undertaken,  and  to  determine,  so  far  as 
may  be  possible,  the  ability  and  willingness  of  the  ap- 
plicant to  perform  that  obligation.  And  it  is  especially 
important  that  a  proper  selection  be  made  in  the  first  in- 
stance; for  there  are  comparatively  few  cases  where  a 
bond,  when  once  executed  and  delivered,  can  be  can- 
celled before  its  natural  expiration.  There  is  also  an 
essential  difference  in  this  respect  between  insurance  and 
suretyship.  A  contract  of  insurance  is  a  private  contract 
between  two  parties,  by  which  one,  for  a  consideration, 
agrees  to  indemnify  the  other  against  loss  upon  the 
happening  of  a  named  contingency;  and  they  may,  by 
mutual  agreement,  terminate  the  insurance;  or  they 
may,  and  generally  do,  by  stipulation  in  the  policy,  fix 


20  INTRODUCTION. 

the  terms  and  conditions  upon  which  either  party  may 
terminate  it. 

A  surety  bond  is  a  contract  between  three  parties ; 
principal  and  surety  on  one  side,  and  obligee  on  the 
other;  and  it  can  be  cancelled  before  its  natural  ex- 
piration, only  with  the  consent  of  the  obligee.  Where 
the  obligee  is  a  private  individual,  firm  or  corporation, 
such  consent  may  of  course  be  given ;  and  a  stipulation, 
authorizing  the  surety  to  terminate  the  bond  by  notice, 
may  be  put  in  the  bond.  Some  bonds  do  contain  such 
a  stipulation,  but  many  bonds  are  given  for  the  per- 
formance of  a  single  obligation,  (a  building  contract, 
for  example)  ;  and  it  would  be  inconsistent  with  the 
nature  of  the  undertaking  to  permit  the  surety  to  can- 
cel before  the  complete  performance  of  that  obligation. 
In  practice,  such  bonds  do  not  contain  a  provision  for 
cancellation.  Where  the  obligee  is  a  state,  county,  city 
or  other  body  politic,  its  consent  to  a  cancellation  of  the 
bond  can  be  given  only  by  law;  and  if  the  law  does 
not  make  provision  for  cancellation,  no  officer,  board 
or  court  can  grant  a  valid  release. 

It  is  important  also  to  make  satisfactory  provision 
for  the  payment  of  the  agreed  premium ;  and  herein  lies 
another  distinction  between  insurance  and  suretyship. 
The  agreed  premium  is  the  consideration  for  a  policy 
of  insurance;  and  if  the  insured  refuses  to  pay  the 
premium,  there  is  a  failure  of  consideration  and  he 
cannot  enforce  the  contract.  In  suretyship,  the  prin- 
cipal generally  arranges  for  the  bond  and  agrees  to 
pay  the  premium;  but  the  validity  of  the  bond,  when 
executed  or  delivered,  does  not  depend  upon  the  pay- 


INTRODUCTION.  21 

ment  of  the  premium.  A  bond  is  an  obligation  of  the 
principal  and  surety  in  favor  of  the  obligee,  and  is 
given  in  order  that  the  principal  may  qualify  for  some 
office  or  position.  Although  the  promise  of  the  princi- 
pal to  pay  the  premium  may  be  the  thing  that  induced 
the  surety  to  execute  the  bond,  yet  the  consideration 
which  makes  it  a  binding  obligation,  and  which  the  law 
recognizes,  is  the  benefit  which  accrued  to  the  princi- 
pal, in  that  he  was,  by  the  giving  of  the  bond,  enabled 
to  qualify  for  the  office  or  position.  It  follows  that  the 
failure  of  the  principal  to  pay  the  premium  cannot 
affect  the  validity  or  binding  effect  of  the  bond.  It 
logically  follows,  however,  that  where  the  obligee  ar- 
ranges for  the  bond,  and  agrees  to  pay  the  premium, 
his  refusal  to  pay  it,  will  prevent  recovery. 

Surety  companies  have  applications  for  many  dif-c^JJ|J  of 
ferent  kinds  of  bonds,  but  the  more  important  classes 
are  as  follows:  bonds  for  private  employees,  that  is, 
ordinary  employees  of  individuals,  firms  and  corpora- 
tions; bonds  for  public  officers;  for  executors,  admin- 
istrators, trustees  and  other  fiduciaries ;  appeal  attach- 
ment, injunction,  replevin  and  other  court  bonds ;  bonds 
for  contractors;  for  banks,  as  depositories  of  public 
or  private  funds ;  bonds  required  by  the  Internal  Reve- 
nue Department  of  the  Federal  Government ;  bonds  re- 
quired by  the  customs  department;  indemnity  bonds 
against  loss  as  a  result  of  issuing  duplicates  of  lost 
instruments;  bonds  covering  accounts  receivable  as- 
signed by  a  merchant  as  security  for  a  loan ;  qualifying 
bonds  for  insurance  companies;  and  numerous  other 
miscellaneous  classes. 


Difficulties  of 
Determining 
What  Bonds 
Should  be 
Issued. 


22  INTRODUCTION. 

Each  of  these  different  classes  presents  its  own 
peculiar  problems.  In  some  cases,  such  as  private 
employees,  honesty  on  the  part  of  the  applicant  may 
be  a  sufficient  guarantee  of  safety,  although  the  char- 
acter of  his  position  will  affect  the  probability  that  he 
will  be  honest.  In  other  cases,  such  as  public  officers 
and  fiduciaries,  not  only  honesty  but  ability  to  perform 
their  duties  is  necessary.  In  still  other  cases,  such  as 
appeal  bonds,  the  applicant  must  have  financial  re- 
sponsibility, or  collateral  security  must  be  required. 
And  finally,  there  are  cases,  such  as  contractors,  where 
the  applicant  must  have  all  of  these  elements— honesty, 
ability  and  financial  responsibility. 

In  order  that  a  general  surety  underwriter,  as  an 
agent  or  branch  manager,  is  compelled  to  be,  may  in- 
telligently pass  upon  the  applications  that  will  be  sub- 
mitted to  him,  he  must  have  a  wide  knowledge  of  the 
subject,  as  well  as  a  clear  head  and  sound  judgment. 
He  must  be  able  to  recognize  indications  of  probable 
dishonesty  in  an  applicant,  and  must  know  how  that 
probability  will  be  affected  by  the  duties  and  liabilities, 
opportunities  and  temptations  of  employees,  public  of- 
ficers, fiduciaries  and  others.  He  must  know  the  ele- 
ments of  strength  and  weakness  in  contractors  and  must 
know  the  dangers  inherent  in  particular  contracts.  He 
must  be  able  to  tell  when  a  bank  is  in  a  good  sound 
condition  and  reasonably  safe  for  depositors,  and  he 
must  know  the  chances  of  loss  under  different  condi- 
tions. He  must  be  able  to  recognize  bonds  that  guar- 
antee the  payment  of  money,  and  to  that  end,  must 
often  look  beyond  the  surface  of  things;  and  where 


INTRODUCTION.  23 

the  bond  does  guarantee  the  payment  of  money,  he 
must  know  what  is  necessary  for  the  protection  of  the 
surety.  In  general,  he  must  know  the  exact  character 
and  the  extent  of  the  obligation  to  be  assumed  by  the 
applicant  and  must  be  able  to  determine,  as  far  as  is 
reasonably  possible,  whether  or  not  the  applicant  is  able 
and  willing  to  perform  that  obligation — whether  or  not 
he  has  the  requisite  integrity,  ability  and  financial  re- 
sponsibility to  warrant  the  assumption  that  he  can  and 
will  measure  up  to  the  requirements  of  the  particular 
case. 

It  will  be  the  object  of  the  succeeding  pages  to  explain  °|^c*  *fdthe 
the  character  and  extent  of  the  risk  of  the  surety  on  Book" 
the  several  classes  of  bonds  and  to  give  such  information 
as  will  enable  the  underwriter  to  determine  the  desira- 
bility of  the  risk.     Although  this  is  not  intended  to  be 
a  law  book,  yet  the  principal  points  of  law  affecting  the 
risk  of  the  surety  will  be  given.     The  general  rule  will 
be  stated  in  the  text ;  and  where  the  rule  in  the  several 
States  is  not  uniform,  the  law  of  each  State  will  be 
given  in  annotations. 


CHAPTER  I. 

FIDELITY  BONDS. 

Section  1. — Scope.  In  a  broad  sense,  all  bonds  with 
surety  may  be  said  to  be  fidelity  bonds,  in  that  they 
guarantee  the  fidelity  of  the  principal  in  the  perform- 
ance of  a  duty  or  obligation.  In  the  sense  in  which  the 
term  is  here  used,  and  in  which  it  is  generally  used  by 
surety  companies,  it  embraces  only  bonds  given  by  pri- 
vate employees  to  protect  their  employers  against  loss 
on  account  of  their  infidelity.  The  term  "  private  em- 
ployees" is  here  used  in  contradistinction  to  public  em- 
ployees or  public  officers,  but  where  the  clerks  employed 
in  a  public  office  are  not  required  by  law  to  give  bond, 
but  do  so  at  the  request  of  and  for  the  protection  of 
their  superior,  who,  under  the  law,  is  liable  for  their 
defaults,1  the  regular  fidelity  bond  is  generally  used, 
so  that  the  risk  of  the  surety  is  the  same  as  if  they 
were  private  employees.  In  this  chapter,  therefore,  I 
shall  deal  with  the  bonds  of  all  private  employees  and 
such  public  employees  as  give  bond,  not  to  the  state  in 
compliance  with  law,  but  to  their  superior,  who  is  liable 
to  the  state  for  their  defaults. 

Sec.  2.— The  Liability  Under  Fidelity  Bonds.  The 
ordinary  fidelity  bond  does  not,  as  its  name  would  prob- 
ably imply,  guarantee  the  fidelity  in  all  respects  of  the 
employee — that  is,  it  does  not  guarantee  the  full  and 
complete  faithful  performance  of  his  duties.  On  the 

iSee   Section  36. 


FIDELITY  BONDS.  25 

contrary,  the  bond  ordinarily  issued  by  surety  com- 
panies is  limited  to  cover  loss  resulting  only  from  cer- 
tain specified  acts  on  the  part  of  the  employee.  In  the 
earlier  days  of  corporate  suretyship,  it  was  deemed 
prudent  to  protect  the  employer  only  against  such  loss 
as  might  result  from  acts  for  which  the  employee  could 
be  criminally  punished,  as  the  fear  of  punishment  was, 
and  is,  regarded  as  a  very  strong  incentive  to  honesty. 
Accordingly  fidelity  bonds  generally  covered  only  such 
loss  as  might  result  from  acts  amounting  to  larceny  or 
embezzlement. 

It  was  found,  however,  that  some  courts  and  many 
employers  construed  a  fidelity  bond  to  be  a  guarantee 
that  the  principal  would  not  wrongfully  and  in  bad 
faith  misappropriate  the  employer's  money  or  property; 
and  it  often  happened  that  bonds,  which  by  their  terms 
covered  only  larceny  and  embezzlement,  were  liberally 
construed  in  favor  of  the  employer,  with  the  result  that 
the  surety  companies  were  held  liable  in  many  cases 
where  the  employee  escaped  criminal  prosecution.  At 
a  comparatively  early  date,  therefore,  some  of  the  com- 
panies began  to  issue  bonds  expressly  covering  all  loss 
resulting  from  fraud  and  dishonesty  on  the  part  of 
the  employee  and  most  of  the  other  companies  soon  be- 
gan to  do  the  same.  Recently  the  companies  have  been 
issuing  a  still  broader  bond,  covering  also  loss  resulting 
from  forgery,  misappropriation,  wrongful  abstruction 
and  wilful  misapplication  by  the  employee.  It  is  doubtful, 
however,  if  these  words  actually  broaden  the  liability, 
as  any  such  act  would  probably  be  dishonest  or  fraudu- 
lent. The  essence  of  the  risk  under  almost  any  form 


26  FIDELITY  BONDS. 

of  bond  is  the  chance  that  the  principal  will  wrongfully 
and  in  bad  faith  misappropriate  the  employer's  money 
or  property. 

Sec.  3. — Termination  of  Liability.  It  was  stated  in 
the  introduction  that  as  a  general  rule  bonds  with  surety 
could  not  be  cancelled  by  the  surety  before  their  natu- 
ral expiration.  Fidelity  bonds  are  an  exception  to  that 
rule.  They  are  private  contracts  between  the  employer 
and  the  surety  company  and  the  parties  may  agree 
upon  such  terms  as  they  see  fit.  And  it  is  entirely 
consistent  with  the  nature  of  the  obligation  that  the 

surety  should  be  permitted  to  terminate  the  liability  for 
the  future  acts  of  the  employee,  as  the  employee  may  at 
any  time  be  discharged  without  seriously  affecting  the 
rights  of  the  employer.  Accordingly,  these  bonds  usu- 
ally contain  a  provision  for  termination  of  liability 
upon  ten  days'  notice,  the  surety  remaining  liable  for 
any  breach  of  the  bond  that  may  have  been  committed 
prior  to  the  expiration  of  that  period,  provided  such 
default  is  discovered  within  the  time  fixed  by  the  bond, 
usually  six  months  or  a  year  after  termination. 

Sec.  4.— The  Underwriting  of  Fidelity  Bonds.  We 
now  come  to  our  principal  object  of  determining  how 
to  "underwrite"  these  bonds — that  is  to  say,  of  deter- 
mining the  circumstances  under  which  they  may  be 
written  and  the  circumstances  under  which  they  should 
be  declined. 

We  have  seen  that,  whatever  may  be  the  particular 
acts  covered  by  the  bond,  the  essence  of  the  risk  or 
hazard  is  the  chance  that  the  applicant  is  dishonest 
and  will,  if  he  gets  sufficient  opportunity,  take  his  em- 


FIDELITY  BONDS.  27 

ployer's  money.  In  underwriting  these  bonds,  there- 
fore, the  essential  thing  is  to  be  satisfied  -that  the  appli- 
cant is  honest.  Honesty  is,  however,  only  a  relative 
term.  A  man  who  will  not  take  his  employer's  money 
under  some  conditions,  may  do  so  under  other  condi- 
tions, so  it  is  necessary  to  be  satisfied  not  only  that  the 
applicant  is  reasonably  honest,  but  that  he  probably  will 
not,  under  the  conditions  that  will  exist  in  the  par- 
ticular case,  take  any  of  his  employer's  money.  It  is 
necessary,  therefore,  to  consider  an  applicant  for  a 
fidelity  bond  from  two  standpoints — namely:  first,  his 
personality — whether,  in  the  abstract,  he  is  honest ;  and, 
second,  the  nature  of  the  position  he  will  occupy — 
whether,  under  the  particular  conditions  that  will  exist, 
he  can  be  depended  upon  to  resist  the  temptation  to 
take  his  employer's  money. 

In  discussing  the  problems  of  underwriting,  it  is  not 
practicable  to  consider  each  position  or  class  of  posi- 
tions. It  is  better  to  reduce  the  matter  to  general  prin- 
ciples— that  is  to  say,  to  point  out  those  things  which, 
when  present  in  any  case,  tend  to  show  that  the  em- 
ployee cannot  be  depended  upon  to  resist  the  temptation 
to  take  his  employer's  money.  By  considering  each  ap- 
plicant in  the  light  of  these  principles,  the  character 
and  extent  of  the  risk  and  the  chances  of  loss  may, 
with  reasonable  accuracy,  be  determined.  In  other 
words,  the  object  will  be  to  fix  a  standard  by  which  the 
hazard  or  risk  in  any  position  may  be  judged. 

In  order  that  the  subject  may  be  made  as  clear  and 
specific  as  possible,  an  attempt  will  be  made  to  dis- 


28  FIDELITY  BONDS. 

tinguish  between  those  things  which  it  is  essential  to 
know,  and  those  which  it  is  merely  desirable  to  know; 
and  between  those  things  which  make  a  risk  totally  un- 
acceptable and  those  which  render  it  merely  not  first- 
class. 

Sec.  5. — The  Personality  of  the  Applicant.  Ante- 
cedents and  Environment.  In  attempting  to  determine 
the  probable  honesty  of  an  applicant  for  a  fidelity  bond, 
it  is  important,  in  many  cases,  to  consider  his  anteced- 
ents, and  his  early  training  and  environment.  Where 
a  man  has  established  a  satisfactory  record  of  his  own, 
that  record  should  be  the  sole  guide  in  determining  the 
manner  of  man  he  is ;  and  in  that  event,  it  is  not  neces- 
sary to  pay  much  attention  to  the  matter  of  his  ancestry 
or  his  early  environment.  But  where  the  applicant  is 
a  young  man  who  has  not  held  responsible  positions  for 
as  long  as  five  years,  and  who  therefore  has  not  made  a 
substantial  record  of  his  own,  a  consideration  of  his 
antecedents  and  early  environment  is  essential ;  although 
there  are  not  many  cases  where  this  matter  is  of  suffi- 
cient importance  to  justify  the  declining  of  the  risk. 
There  are  only  a  few  classes  of  persons  whose  descend- 
ants are  prima  facie  unreliable ;  and  the  more  important 
of  these  classes  are : 

A. — Negroes,  who,  as  a  class,  have  been  found  to  be 
undesirable  risks  for  a  surety  company,  especially  where 
they  will  handle  money. 

B. — The  lower  classes  of  foreigners,  or  even  of 
Americans,  particularly  those  who  live  in  the  slums  of 
the  large  cities,  where  the  atmosphere  is  not  at  all  con- 


FIDELITY  BONDS.  29 

ducive  to  the  development  of  a  keen  sense  of  moral 
responsibility. 

C. — Those  who  have  criminal  records,  or  who  have 
been  guilty  of  such  serious  breaches  of  the  moral  law  as 
to  indicate  that  they  have  criminal  instincts. 

D.— Those  who  have  very  "  sporty "  tendencies,— 
whose  lives  are  immoral  who  drink  liquor  freely,  habitu- 
ally play  cards  or  otherwise  gamble,  who  work  little  or 
none  and  spend  money  or  contract  debts  almost  regard- 
less of  income. 

The  offspring  of  these  classes  may,  and  very  often 
do,  turn  out  to  be  fine  men ;  but  the  percentage  of  fail- 
ures is  great  enough  to  justify  us  in  the  conclusion  that 
a  surety  company  ought  not  to  guarantee  the  fidelity 
of  such  a  man  until  he  has  established  his  own  record 
by  serving  in  responsible  positions  for  several  years, 
with  a  clean  record,  and  good  habits. 

Sec.  6.— Habits.  The  next  thing  to  be  considered 
is  the  character  of  the  man  himself  as  it  may  be  in- 
dicated by  his  habits;  and  in  every  case  this  matter 
should  receive  most  careful  investigation  and  consid- 
eration, as  it  is  the  most  important  element  in  deter- 
mining the  chance  of  loss.  Surety  Companies,  of  course, 
cannot  afford  to  judge  applicants  by  Puritanical  stand- 
ards, but  there  are  certain  habits  which  experience  has 
shown  are  likely  to  lead  to  defalcations ;  and  while  the 
effect  of  these  habits  is  well  known  to  the  average  man 
and  therefore  need  not  be  dwelt  upon,  it  seems  appro- 
priate at  this  point  to  enumerate  the  more  important 
ones,  as  follows: 


. 


30  FIDELITY  BONDS. 

A. — Speculating  or  gambling  on  the  stock,  grain  or 
cotton  exchange.  This  habit  has  led  to  very  many  and 
very  large  defalcations,  and  it  is  evident  that  a  man  who 
engages  in  this  form  of  gambling  should  not  be  bonded. 
The  bare  fact  that  a  man  carries,  or  is  suspected  of  car- 
rying, a  margin  account  with  a  broker,  even  though  it 
may  be  small,  is  in  my  judgment,  sufficient  to  warrant 
an  underwriter  in  declining  the  risk. 

B. — Card  playing  and  similar  forms  of  gambling 
are  generally  looked  upon  with  disfavor  by  under- 
writers, but  as  a  matter  of  fact,  comparatively  few  de- 
faults have  been  attributable  to  losses  at  cards;  and  it 
seems  to  me  that  it  is  only  where  a  man  plays  with 
such  frequency  or  for  a  large  enough  stake  to  materially 
affect  his  income,  that  his  application  should  be  de- 
clined. 

C. — Extravagance  and  fast  living.  It  is,  of  course, 
well  known  that  this  habit  has  led  to  many  defaults, 
and  underwriters  look  with  disfavor  upon  applicants 
who  have  been  in  the  habit  of  frequenting  saloons, 
pool  rooms  and  houses  of  ill  fame  or  associating  with 
questionable  characters  of  either  sex,  particularly  if 
the  salary  of  the  applicant  is  small  or  apparently  in- 
sufficient to  warrant  the  expenditures  which  are  likely 
to  accompany  these  habits.  It  is,  however,  manifestly 
impossible  to  lay  down  any  general  rule  as  to  what  is 
and  what  is  not  proper  conduct.  The  underwriter  will 
determine  in  each  case  whether  or  not  the  applicant 
engages  in  these  or  similar  practices  to  a  sufficient  ex- 
tent as  to  be  likely  to  call  for  expenditures  beyond 
his  income.  If  there  in  anything  to  indicate  a  reason- 


FIDELITY  BONDS.  31 

able  probability,  or  even  a  reasonable  possibility,  that 
he  will  do  so,  the  application  should  be  declined. 

D.  —  The  excessive  use  of  alcoholic  liquors.  This 
practice  not  only  tends  to  undermine  a  man's  normal 
fiber  and  to  weaken  his  power  to  resist  temptation,  but 
it  often  accompanies  or  leads  to  extravagances  or  fast 
living.  It  often  happens  that  heavy  drinking  is  the 
only  detrimental  habit  that  will  develop  in  the  course 
of  the  investigation  ;  but,  in  the  absence  of  definite  in- 
formation to  the  contrary,  it  may  fairly  be  assumed  that 
such  drinking  is  accompanied  by  the  usual  extrava- 
gances and  indulgence.  Hence,  the  excessive  use  of 
such  liquors  is  of  itself  sufficient  to  warrant  the  declina- 
tion of  an  application. 

Sec.  7.  —  Financial  Condition.  As  a  general  propo- 
sition, an  application  for  a  fidelity  bond  should  be 
considered  and  acted  upon  entirely  apart  from  the 
financial  condition  of  the  applicant;  that  is  to  say, 
while  financial  strength  is  a  very  desirable  qualifica- 
tion in  an  applicant,  it  is  not  an  essential  one.  If  an 
applicant  is  satisfactory  in  other  respects,  he  may  freely 
be  accepted,  although  he  may  have  no  means  other  than 
his  salary;  and  if  his  record  and  habits  are  bad,  he 
should  not  be  accepted,  even  though  reputed  to  have 
money.  However,  where  an  applicant  is  known  to  have 
considerable  money,  slight  imperfections  in  his  habits 
do  not  necessarily  make  the  risk  undesirable.  So  also, 
if  his  parents  or  other  near  relatives  are  well  to  do, 
slight  imperfections  may  be  passed,  as  they  may  reason- 
ably  be  expected  to  come  to  his  rescue  in  case  of  trouble. 


ry 


32  FIDELITY  BONDS. 

While  a  man  who  has  no  financial  resources  may 
freely  be  accepted,  caution  must  be  exercised  with  the 
man  who  not  only  has  nothing  but  who  is  in  debt.  Such 
a  man  will  probably  be  called  upon  to  use  a  part  of 
his  earnings  to  liquidate  the  debt  and  thereby  decrease 
the  amount  to  be  devoted  to  the  maintenance  of  him- 
self and  his  family.1  And  he  may  be  so  hard  pressed  as 
to  think  it  advisable  to  " borrow"  from  his  employer 
in  order  to  get  rid  of  his  creditor.  If  the  debt  happens 
to  be  due  the  employer  he  may  ' '  borrow ' '  with  one  hand 
to  pay  with  the  other,  thus  imposing  upon  the  surety 
a  liability  for  what  is  really  a  mere  debt ;  and  where, 
he  owes  the  employer,  he  is  more  likely  to  be  compelled 
to  use  a  part  of  his  earnings  to  repay  the  loan ;  and  in 
the  event  of  default,  it  is  probable  that  any  credits  to 
which  he  might  be  entitled  by  way  of  salary  or  other- 
wise would  be  consumed  in  liquidating  the  debt,  rather 
than  liquidating  the  liability  of  the  surety.  It  is  the 
same  way  with  any  property  he  might  have.  There- 
fore, unless  the  debt  is  secured  by  good  collateral,  it 
is  better  to  avoid  the  man  who  is  in  debt,  particularly 
if  he  is  indebted  to  his  employer. 

Sec.  8. — The  Investigation.  As  we  have  seen  it 
is  not  always  easy  to  get  correct  information  as  to 
the  antecedents,  environment,  character  and  habits 
of  an  applicant.  If  we  could,  perhaps  there  would 
not  be  so  much  need  for  bonding  companies.  About 
the  only  sources  from  which  it  is  practicable  to  get  this 
information  are  the  applicant  himself,  the  persons  to 
whom  he  refers,  and  his  former  employers. 

iSee  Section  14. 


FIDELITY  BONDS. 


33 


The  applicant  is  not  likely  to  give  unfavorable  in- 
formation in  regard  to  himself  so  that  this  source  of  in- 
vestigation is  of  little  value.  Likewise  it  is  hardly  reas- 
onable to  expect  that  an  applicant  will  refer  to  p-eople 
who  will  intentionally  give  damaging  information  re- 
garding him,  so  it  is  not  well  to  put  much  dependence  in 
the  replies  of  the  references ;  and  in  cases  of  very  small 
bonds,  I  believe  it  will  be  as  well  to  omit  sending  out 
reference  letters.  Where  reference  letters  are  sent  out 
the  replies  should  be  considered  from  at  least  four  stand- 
points, namely:  the  standing  of  the  reference,  the  ex- 
tent of  his  acquaintance  with  the  applicant,  what  he 
says,  and  what  he  fails  to  say.  The  standing  of  the  ref- 
erences will  have  an  important  bearing  upon  the  prob- 
able truth  and  accuracy  of  their  statements,  as  well  as 
upon  the  probable  character  and  standing  of  the  appli- 
cant. The  man  who  can  get  a  ' '  certificate  of  character, ' ' 
so  to  speak,  from  a  bank  president,  who  is  intimately 
acquainted  with  him  and  his  family,  is  likely  to  be  in- 
finitely a  better  risk  than  the  man  who  refers  to  a 
saloonkeeper,  a  "  bookmaker "  or  a  person  having  no 

particular  standing. 

It  is  also  important  to  note  the  extent  of  the  ac- 
quaintance of  the  reference  with  the  applicant.  The 
fact  that  a  man  does  not  refer  to  persons  who  know 
him  well  is  a  suspicious  circumstance,  for  almost  any 
man,  if  he  wishes  to,  can  refer  to  men  who  do  know 
him  well ;  and  the  fact  that  he  does  not  do  so  may  be 
a  sign  that  those  who  are  well  acquainted  with  him 
would  probably  not  give  a  favorable  opinion. 

It  is  unnecessary  to  call  attention  to  the  import- 


34  FIDELITY  BONDS. 

ance  of  weighing  carefully  any  damaging  information 
given  by  a  reference,  for  such  information  may  be  as- 
sumed to  be  true ;  but  it  is  also  important  to  note  any 
apparent  evasion  or  omission  to  answer  the  questions 
asked.  There  are  many  men  who  will  not  deliberately 
give  a  false  answer  to  questions  of  this  kind  but  who 
will  evade  them  or  omit  to  answer  them.  This  probably 
results  from  a  natural  disinclination  to  speak  ill  of 
others,  particularly  one's  friends;  but,  in  making  in- 
vestigations of  this  kind,  surety  companies  ought  to 
have  the  whole  truth ;  and  if  there  is  any  indication  that 
they  are  not  getting  it,  they  should  move  cautiously. 

The  really  valuable  information  concerning  an  ap- 
plicant is  to  be  had  from  his  former  employers;  for  a 
good  clean  record  covering  continuous  service  for  as 
much  as  ten  years  warrants  the  assumption  that,  in  the 
absence  of  extraordinary  opportunities  and  temptations,1 
the  applicant  will  continue  to  be  honest ;  and  conversely, 
if  he  has  been  dishonest  in  the  past,  he  is  not  to  be 
trusted  for  the  future.  jr 

In  view  of  the  importance  of  obtaining  the  record 
of  the  past  employment  of  an  applicant,  it  is  essential 
that  he  be  required  to  give  the  name  and  address  of 
all  his  employers  during  the  preceding  ten  years.  In 
order  to  warrant  the  acceptance  of  the  risk,  it  is  essen- 
tial that,  if  possible,  a  reply  be  obtained  from  each  of 
these  employers,  confirming  the  period  of  the  employ- 
ment as  well  as  giving  the  applicant  a  favorable  report. 
If  a  reply  be  not  obtained,  acceptance  of  the  risk  should 
be  withheld  until  a  satisfactory  explanation  is  made, 

iSee  Sections  9-16. 


FIDELITY  BONDS.  35 

such  as  that  the  employer  is  dead  or  out  of  business 
and  his  whereabouts  unknown.  When  a  situation  like 
this  develops,  caution  must  be  exercised  and  a  very 
careful  investigation  made,  as  the  name  of  a  fictitious 
employer  may  have  been  given  to  conceal  the  real  em- 
ployer, who  had  an  unsatisfactory  experience  with  the 
applicant. 

Given  a  complete  record  of  the  employment  of  an 
applicant  for  as  much  as  ten  years,  and  a  showing 
that  that  record  is  clean  and  free  from  any  suspicion 
of  dishonesty,  and  that  so  far  as  the  former  employers 
know,  applicant's  habits  are  good,  then  I  think  it  fair 
to  assume,  in  the  absence  of  extraordinary  opportunities 
and  temptations  in  the  present  employment,  that  he 
may  be  depended  upon  to  be  honest.  In  that  event, 
the  replies  of  the  references  are  really  of  little  moment. 

Sec.  9.— The  Nature  of  the  Position.  In  General. 
We  have  been  discussing  the  matter  of  how  to  deter- 
mine whether  or  not  an  applicant  for  a  fidelity  bond 
is  honest.  It  has  been  said,  however,  that  there  are 
no  absolutely  honest  human  beings.  The  cynical  say- 
ing that  "every  man  has  his  price "  expresses  the  idea. 
While  most  people  are  unwilling  to  give  credence  to 
any  such  thought,  yet  it  is  a  well  known  fact  that 
the  question,  whether  or  not  an  employee  is  likely  to 
take  his  employer's  money,  does  depend  in  a  measure 
upon  the  opportunities  he  will  have  and  the  temptations 
to  which  he  will  be  subject;  and  it  is  manifest  that  it 
is  not  possible  to  determine  the  hazard  to  which  the 
surety  for  an  employee  will  be  subject  unless  the  oppor. 
tunities,  temptations  and  liabilities  incident  to  the 


36  FIDELITY  BONDS. 

position  are  ascertained  and  unless  their  effect  upon 
the  risk  is  known. 

The  opportunities,  temptations  and  liabilities  are 
usually  ascertained  by  requiring  the  employer  to  an- 
swer certain  questions  concerning  the  duties,  and  lia- 
bilities of  the  applicant  and  the  checks  and  audits  that 
will  be  enforced ;  and  it  will  be  my  purpose  in  the  suc- 
ceeding pages  to  discuss  the  possible  opportunities, 
temptations  and  liabilities  of  employees,  with  a  view  of 
determining  their  effect  upon  the  risk  of  the  surety. 

Sec.  10. — Opportunities.  The  amount  of  money  to  be 
handled.  It  is  of  course  manifest  that  the  risk  bears 
some  relation  to  the  amount  of  money  that  will  come 
into  the  hands  of  the  employee,  and  the  amount  that 
will  be  on  hand  at  one  time.  In  the  case  of  employees 
in  the  main  office  of  the  employer,  the  amount  of  money 
to  be  handled  is  not  an  important  consideration,  as  it 
may  be  assumed  that  the  risk  is  in  proportion 
to  the  amount  of  the  bond.  But  in  the  case  of  em- 
ployees who  are  away  from  the  main  office — agents, 
branch  managers,  solicitors,  collectors  and  the  like — it  is 
important  not  only  to  consider  the  amount  of  money 
likely  to  be  on  hand  at  any  one  time,  but  also  to  see 
that  they  are  required,  at  frequent  intervals,  to  turn 
in  all  money  received,  so  that  they  will  not,  in  ordinary 
course  of  business,  have  on  hand  a  large  sum.  There 
may  be  nothing  to  prevent  them  from  neglecting  to  ac- 
count for  some  of  the  money  that  has  come  into  their 
hands,  but  the  fact  that  an  accounting  is  necessary  has 
a  restraining  effect,  and  accountings  should  be  required 


FIDELITY  BONDS.  37 

not  less  than  once  a  month ;  and  in  the  case  of  such  em- 
ployees as  drivers  for  laundries,  and  the  like,  daily  ac- 
counting should  be  made.  These  requirements  should 
be  a  condition  precedent  to  the  issuance  of  the  bond. 

Sec.  11. — Extent  of  control  over  Employer's  Money. 

Where  the  money  is  to  be  handled  solely  by  the  appli- 
cant and  where  he  could  take  it  without  the  knowledge 
or  consent  of  any  other  person,  the  opportunity  is  prac- 
tically unlimited ;  and  it  is  lessened  to  the  extent,  that 
it  is  necessary  for  him  to  obtain  the  consent  or  collusion 
of  another,  or  to  bring  a  defalcation  to  the  attention 
of  another.  Where,  for  example,  one  man  has  exclus- 
ive control  of  an  office  and  personally  handles  the  cash, 
or  has  such  control  over  it  that  no  one  else  would  ob- 
serve or  take  note  of  a  defalcation;  where  a  man  has 
the  right,  without  counter-signature,  to  check  against 
the  employer's  bank  account,  or  to  draw  on  the  em- 
ployer; where  a  man  is  acting  as  both  bookkeeper  and 
cashier  so  that  he  could  himself  "doctor"  the  books 
and  cover  up  his  shortage ;  where  a  man  is  on  the  road 
having  the  custody  of  his  employer's  goods,  or  collect- 
ing or  disbursing  his  employer's  funds — in  all  these 
cases,  the  opportunities  are  practically  unlimited,  and 
the  only  safeguard  is  to  audit  very  frequently  the  books 
and  accounts  of  the  employee  and  to  verify  the  cash  on 
hand  and  outstanding.  It  is  not  necessary  to  decline 
all  applications  where  the  opportunities  are  thus  un- 
limited, but  it  is  necessary  to  be  sure  that  the  person- 
ality of  the  applicant  is  up  to  the  highest  standard, 
and  that  frequent  audits  will  be  made. 


38 


FIDELITY  BONDS. 


Where,  on  the  other  hand,  though  a  man  has  con- 
trol over  an  office,  yet  the  funds  are  actually  handled, 
and  the  books  kept,  by  another,  so  that,  barring  secret 
personal  collections  made  outside  of  his  regular  duties, 
no  money  would  come  into  his  hands;  where  counter- 
signature  is  necessary  on  checks  and  drafts;  and  where 
one  person  is  cashier  and  another,  bookkeeper,  so  that 
neither  could  easily  get  any  money  without  the  col- 
lusion of  the  other,  the  risk  is  lessened.  In  the  case 
of  collectors  and  other  traveling  men,  it  is  almost  im- 
possible to  limit  their  control  over  the  funds  or  property 
in  their  hands,  and,  as  we  shall  see,  the  risk  on  such 
employees  is  very  great  and  can  be  limited  only  by 
frequent  audits.  A  promise  by  the  employer  to  make 
frequent1  and  thorough  audits  should  be  a  condition 
precedent  to  the  execution  of  bonds  for  such  employees, 
and  even  then  they  can  be  issued  only  when  the  condi- 
tions of  the  employment  are  satisfactory.2 

Sec.  12. — Opportunity  to  conceal  Shortage.    A  man 

may  have  abundant  opportunity  to  take  his  employer's 
money,  but  he  is  not  likely  to  do  so,  if  it  is  certain  that 
the  defalcation  will  be  discovered  immediately  or  at  the 
end  of  a  few  weeks.  It  is  of  the  utmost  importance 
therefore,  in  cases  where  the  opportunity  is  great,  to 
require  the  employer  to  promise  to  make  very  frequent, 
as  well  as  efficient,  audits  of  the  books  and  accounts  of 
the  employees  and  to  verify  the  cash  on  hand  or  out- 
standing. 

iSee  next  Section. 
2See  Sections  12-19. 


FIDELITY  BONDS.  39 

Such  audits  are  likely  to  result  in  the  discovery  of  a 
shortage  before  it  has  gone  very  far,  as  defaulters  us- 
ually begin  by  taking  small  amounts;  and  the  knowl- 
edge that  such  audits  are  to  be  made  is  likely  to  have 
the  effect  of  deterring  the  employees  from  committing 
any  default. 

Competition  has  driven  the  surety  companies,  in 
the  case  of  banks  and  a  few  other  high  grade  institu- 
tions, to  waive  the  requirement  for  periodical  audits. 
Indeed  in  some  cases,  employer's  statements  are  waived 
altogether.  This  is  done  on  the  assumption  that  a  care- 
ful supervision  over  the  employees  will  be  exercised; 
that,  in  any  event,  the  opportunities  are  rather  limited ; 
and  that  audits  will  in  fact  be  made  at  least  once  a 
year.  In  most  cases,  it  is  not  deemed  proper,  or  con- 
sistent with  reasonable  prudence,  to  omit  to  require 
periodical  audits.  Audits  made  in  accordance  with  the 
following  schedule  will  generally  be  satisfactory  and 
should  be  required: 

A.  The  main  office  should  be  audited  by  an  out- 
side expert  accountant  once  a  year. 

B.  Agents    and    branch    managers    once    in    six 
months,  and  all  outstanding  accounts  should  be  verified. 

C.  Collectors,  as  we  have  seen,  should  be  required 
to  account  at  least  once  a  month ;  and  as  soon  as  an  ac- 
count is  in  arrears,  a  bill  should  be  sent  direct  by  the 
employer  to  the  customer. 

D.  Drivers  who  collect  should  be  required  to  ac- 
count daily,  and  the  employer  should  be  required  to 
send  bills  directly  to  customers  who  are  in  arrears. 


40  FIDELITY  BONDS. 

The  employer  ought  in  all  cases  to  be  required  to 
give  the  surety  prompt  notice  of  the  discovery  of  a  de- 
fault or  probable  default  on  the  part  of  an  employee, 
as  otherwise  the  audit  and  checks  would  be  of  little 
value  to  the  surety,  and  the  employer  could  retain  in 
his  service  a  man  who  was  known  to  be  a  defaulter,  or 
could  deliberately  permit  the  employee  to  escape  and 
nevertheless  have  the  protection  of  the  surety  com- 
pany. 

Sec.  13. — Temptations.  In  General.  Opportunities 
may  exist,  but  if  there  is  no  strong  incentive  or  induce- 
ment to  take  the  employer's  money,  an  employee  is  not 
likely  to  do  so,  as  normal  human  beings,  in  the  absence 
of  special  temptations,  are  not  prone  to  take  property 
that  does  not  belong  to  them. 

We  have  already  discussed,  under  the  title  of  the 
personality  of  the  applicant,  the  strong  temptation  that 
may  result  from  gambling,  speculating,  extravagance 
and  fast  living.  It  is  important  also,  to  consider  any 
special  inducement  or  temptation  peculiar  to  the  par- 
ticular position.  The  more  important  of  the  tempta- 
tions, which  are  shown  by  the  records  of  surety  com- 
panies to  have  an  influence  on  the  risk,  will  be  indicated, 
so  that  the  underwriter  may,  in  the  light  of  the  em- 
ployer's statement,  look  out  for  them  in  each  case  and 
be  governed  accordingly. 

Sec.  14.— Inadequate  Compensation.  One  of  the 
temptations  that  may  be  inherent  in  a  particular  posi- 
tion is  that  of  inadequate  salary.  We  are  not  now  re- 
ferring to  the  inadequacy  that  may  result  from  extrava- 
gance or  fast  living;  that  has  already  been  consid- 


FIDELITY  BONDS.  .  41 

ered.1  We  are  now  referring  to  the  case  of  a  man  who 
is  forced  to  accept  a  position,  the  salary  of  which  is  not 
actually  sufficient  to  enable  him  to  support  those  de- 
pendent upon  him  in  the  manner  to  which  they  have 
been  accustomed.  The  author  recalls  a  case  where  a 
man  was  the  manager  of  a  branch  store  of  a  large  tailor- 
ing concern,  receiving  a  salary  of  $18.00  per  week. 
Under  some  circumstances,  this  might  have  been  suffi- 
cient, but  he  was  about  forty  years  of  age  and  had 
held  a  better  position;  he  had  a  wife  and  several  chil- 
dren dependent  upon  him  for  support,  and  he  was  ex- 
pected to  dress  well  and  keep  up  appearances  in  order 
to  sell  goods.  Though  he  lived  modestly  in  a  small 
apartment,  his  wife  doing  all  the  housework,  and 
though  they  spent  practically  nothing  on  amusements, 
he  found  at  the  end  of  a  certain  week,  that  he  did  not 
have  quite  enough  to  pay  his  household  expenses,  so  he 
took  out  of  the  cash  drawer,  enough  to  make  up  the 
deficiency,  intending  to  pay  it  back  with  next  week's 
salary.  Instead  of  paying  it  back,  he  found  it  neces- 
sary to  take  more ;  and  this  practice  continued,  despite 
every  economy  he  could  reasonably  practice,  untdl  the 
traveling  auditor,  in  making  his  semi-annual  trip,  dis- 
covered the  shortage  and  discharged  him.  Another 
case  was  where  a  young  man  holding  a  respectable  posi- 
tion in  an  affice,  in  a  large  city,  with  a  salary  of  $65.00 
per  month  decided  to  marry.  He  found  it  impossible, 
though  he  lived  modestly,  to  pay  his  necessary  ex- 
penses; and  having  access  to  his  employer's  money, 
took  a  little  to  make  up  the  deficiency.  The  practice 

iSee  Section  6. 


42  FIDELITY  BONDS. 

continued  until,  at  the  end  of  about  six  months,  the 
shortage  was  discovered.  Instances  could  be  multi- 
plied; but  these  are  sufficient  to  make  it  clear  that, 
though  a  man  may  have  a  good  record,  may  have  no 
bad  habits  and  may  live  modestly,  yet  if  he  is  not  mak- 
ing enough  for  his  needs,  considering  his  station  in  life 
and  the  number  of  persons  dependent  upon  him  for 
support,  he  is  not  a  good  risk.  What  is  an  adequate 
salary  will  of  course  depend  upon  the  facts  and  cir- 
cumstances of  each  case,  and  no  general  rule  can  be 
made. 

Sec.  15. — Where  Amount  of  Compensation  Varies. 
This  matter  of  compensation  is  particularly  important 
when  the  employee  is  paid  by  commissions  so  that  the 
amount  of  income  is  indefinite  or  uncertain,  varying 
with  the  amount  of  business  done.  When  such  a  man 
has  had  a  bad  month  and  does  not  earn  the  amount  he 
has  been  in  the  habit  of  spending,  the  temptation  to 
assume  that  the  next  month's  business  will  be  greater 
and  to  anticipate  the  income  from  the  expected  increase 
by  "borrowing"  a  little  from  the  employer  is  very 
great;  and  this  class  of  bonds  should  on  this  account, 
be  regarded  as  hazardous.  The  fact  that  such  em- 
ployees cannot  generally  be  punished  for  taking  their 
employer's  money  is  an  additional,  and  very  serious 
hazard,  which  will  be  referred  to  in  the  next  section. 

Sec.  16. — Where  there  is  no  Power  in  the  State  to 
Punish  a  Defaulter.  Most  men  are  deterred  from  tak- 
ing property  that  does  not  belong  to  them  by  their 
own  consciences;  others,  by  the  fear  of  public  disap- 


FIDELITY  BONDS.  43 

proval  j  but  there  are  still  others  who  are  not  deterred 
by  anything  short  of  the  fear  of  punishment.  There- 
fore the  reputation  for  relentless  prosecution  of  unfaith- 
ful bonded  employees,  which  the  bonding  companies 
have  gained,  is  believed  to  have  materially  lessened 
the  number  of  such  unfaithful  employees ;  and  impend- 
ing imprisonment  has  induced  the  relatives  of  many 
a  defaulting  employee  to  come  to  his  rescue.  Accord- 
ingly it  was  formerly  thought  necessary  to  the  proper 
conduct  of  the  surety  business  to  impose  a  condition 
that,  in  event  of  a  default,  involving  the  commission 
of  a  crime,  the  employer  would  lay  information  before 
a  proper  officer  and  verify  the  same  as  required  by  law, 
to  the  end  that  a  warrant  for  the  arrest  of  the  employee 
might  be  issued.  Recently  the  companies  have,  in  par- 
ticular cases,  been  waiving  this  requirement,  but  in 
view  of  the  advantages  often  to  be  derived  from  the 
prompt  arrest  of  a  defaulter,  surety  companies  ought 
to  be  slow  to  do  so,  although,  of  course,  it  may  be  good 
business  policy  where  the  volume  of  business  is  large, 
and  where,  as  a  matter  of  fact,  the  employer  intends  to 
cause  the  arrest  of  any  of  his  employees  who  may  com- 
mit criminal  acts.  In  due  season,  the  surety  company 
might  be  able  to  get  the  information  before  the  proper 
authorities,  but  in  the  meantime,  the  defaulter  may 
have  absconded.  Where  the  bond  covers  only  larceny 
and  embezzlement,  such  a  provision  (in  theory  at  least) 
imposes  upon  the  employer  the  obligation  of  laying  the 
information  before  the  authorities  or  abandoning  his 
claim,  and  amounts  to  a  reasonable  assurance  that  the 
surety  will  not  be  held  for  a  default  unless  the  defaulter 


44  FIDELITY  BONDS. 

can  and  will  be  prosecuted.  Where  the  broader  form 
of  bond  is  issued,  the  employer,  notwithstanding  such 
a  provision,  may  decline  to  swear  out  the  warrant  for 
the  arrest  and  nevertheless  will  not  be  estopped  from 
contending  that  the  act  comes  within  the  scope  of  the 
bond.1 

It  is  evident  from  what  has  been  said  that  if,  not- 
withstanding such  a  provision  in  the  bond,  an  unfaith- 
ful employee  cannot  be  prosecuted,  the  chance  of  loss 
on  the  part  of  the  surety  is  increased.  And  it  is  a  well 
established  principle  of  the  law  of  some  of  the  states 
that,  where  an  employee  receives  money  for  joint  ac- 
count of  himself  and  his  employer;  that  is,  where  the 
employee  is  entitled  to  a  percentage  of  the  money  so  re- 
ceived, he  cannot  be  punished  for  failing  to  turn  over 
to  the  employer  the  latter 's  share  of  the  money.  The 
employer  and  employee  are  regarded  as  partners  or 
tenants  in  common  of  the  fund ;  and  it  is  noti  a  crime 
for  partner  or  tenant  in  common  to  take  and  use  the 
common  property  to  the  exclusion  of  the  other  partner. 
The  remedy  of  the  other  partner  is  a  civil  action  for  the 
division  of  the  common  property  and  for  the  recovery 
of  his  share.  So,  in  the  states  where  this  rule  prevails, 
an  agent  or  other  employee,  who  receives  his  compensa- 
tion in  the  shape  of  commissions  on  money  collected 
may  with  impunity,  so  far  as  punishment  is  concerned, 
convert  the  employer's  share  of  the  money  so  collected; 
and  consequently  such  risks  are  not  desirable.  So  far 
as  this  phase  of  the  risk  is  concerned,  it  would  seem  to 
make  no  difference  whether  the  entire  compensation  of 

iSee  Section  2. 


FIDELITY  BONDS.  45 

the  employee  is  paid  by  commissions,  or  part  of  it  as 
salary  and  part  as  commissions.  In  either  event,  he 
would  have  an  undivided  interest  in  all  the  money 
that  would  come  into  his  hands,  and  therefore  the  rule 
would  seem  to  be  applicable. 

While  business  policy  will  often  require  the  taking 
of  one  or  more  employees  on  commission,  along  with  a 
number  of  others  on  salary,  yet,  as  a  general  rule,  such 
employees  are  not  desirable  risks  for  a  surety  company ; 
and  they  should  not  be  accepted  unless  they  measure 
up  to  a  very  high  standard  or  have  very  considerable 
financial  responsibility. 

Sec.  17.— Liabilities  of  Employee— In  General.  We 
have  seen  that  the  surety  on  a  fidelity  bond  is  liable 
only  for  loss  resulting  from  certain  specified  acts  on 
the  part  of  the  employee;  but)  in  underwriting  these 
bonds,  it  is  well  to  take  into  consideration  any  extra- 
ordinary liabilities  that  may  be  incident  to  the  position, 
as  they  may  have  a  material  effect  upon  the  risk  of  the 
surety.  Such  extraordinary  liabilities  usually  result 
from  the  terms  of  the  contract  of  employment ;  and  at- 
tention is  directed  to  the  matter  to  the  end  that  this 
feature  may  not  be  overlooked.  One  or  two  of  the  more 
important  liabilities  will  be  treated  in  some  detail. 

Sec.  18. — Liability  for  Stock  Shortage.  Employees 
who  have  the  custody  of  merchandise  away  from  the 
main  office  of  the  employer  are  generally  charged  with 
the  quantity  sent  to  them,  and  are  required  periodically 
to  account  for  the  amount  shown  by  the  employer's 
books  to  have  been  received.  If  they  cannot  satis- 
factorily account  for  or  explain  the  disappearance 


46  FIDELITY  BONDS. 

of  any  part  of  the  merchandise,  they  will  be  held  liable 
for  that  amount.  Managers  of  coal  and  lumber  yards 
are  typical  examples.  Notwithstanding  the  surety  can- 
not be  legally  held  for  loss  that  does  not  result  from 
an  actual  misappropriation,  bonds  of  this  kind  are  gen- 
erally unsatisfactory. 

A.  Merchandise,  when  delivered  in  wholesale  quan- 
tities, and  retailed,  is  very  apt  to  run  short  to  a  certain 
extent,  and  some  of  it  may  be  taken  by  third  persons. 
It  is  therefore  difficult  in  some  cases  to  tell  whetther 
the  shortage  represents  a  misappropriation  or  not;  and 
the  surety  is  likely  to  be  called  on  to  make  good  a 
shortage  where  the  princip-al  denies  having  made   a 
defalcation,  and  when  there  is  every  reason  to  believe 
he  is  telling  the  truth.     While  the  surety  may  not  be 
held  liable,  there  is  apt  to  be  some  litigation  and  ex- 
pense, resulting  perhaps  in  a  compromise  settlement. 

B.  In  case  of  an  admitted  defalcation,  claim  is 
likely  to  be  made  for  the  whole  shortage,  no  credit  being 
allowed  for  the  natural  or  inevitable  shortage. 

C.  Even  if  the  employer  attempts  to  recover  from 
the  surety  only  the  actual  defalcation,  he  will  likely 
take  advantage  of  any  set-offs,  by  way  of  salary  or  other- 
wise, and  exhaust  the  resources  of  the  employee  in  making 
up  the  shortage,  leaving  the  surety  to  pay  the  defalca- 
tion without  any  chance  of  reimbursement  from  the 
principal. 

In  such  cases  the  bond  should  not  be  written  unless 
the  employer  has  established  a  reputation  for  fair  deal- 
ing, and  the  merchandise  is  reasonably  well  protected 


FIDELITY  BONDS.  47 

from  possible  depredations  by  third  persons,  or  unless 
the  applicant  has  some  considerable  financial  strength. 
However,  where  there  are  a  few  such  employees  on  a 
large  schedule,  it  may  be  reasonably  prudent  to  accept 
them  along  with  the  rest. 

Sec.  19. — Liability  for  Uncollected  Accounts.  In 
many  cases,  agents,  branch  managers  and  the  like  are, 
by  their  contracts  with  their  employers,  liable  for  all, 
or  a  certain  percentage,  of  the  bad  bills  or  uncollected 
•accounts,  While  the  surety  is  liable  only  for  such 
money  as  actually  comes  into  the  hands  of  the  employee 
and  is  misappropriated  by  him,  yet  the  risk  is  undesir- 
able because : 

A.  The  liability  for  uncollected  accounts  imposes 
a  heavy  burden  upon  the  principal,  and  may  decrease 
his  net  earnings  to  such  an  extent  that  there  will  be  tihe 
temptation  that  usually  results  from  inadequate  or  un- 
certain earnings.1 

B.  In  event  of  default,  the  employer  will  likely 
take  advantage  of  any  set-offs  by  way  of  salary  or 
otherwise  and  exhaust  the  resources  of  the  principal  in 
making  up  the  liability  for  uncollected  acounts,  leaving 
the  surety  to  make  up  the  defalcation  with  no  chance  of 
reimbursement. 

In  such  cases,  the  bond  should  noti  be  written  unless 
the  applicant  is  quite  strong  financially— undoubtedly 
strong  enough  to  take  care  of  any  reasonably  possible 
liability  for  uncollected  accounts  without  impairing  his 
means  of  support. 

iSee  Sections  14-15 


CHAPTER  II. 
PUBLIC  OFFICIAL  BONDS. 

Sec.  20. — Scope.  The  bonds  that  will  be  next  con- 
sidered are  those  required  by  law  to  be  given  by  per- 
sons holding  positions  of  public  trust.  They  are  known 
as  public  official  bonds ;  and  this  title  includes  the  bonds 
of  officers  of  the  United  States,  of  the  states,  of  counties, 
municipalities  and  other  political  sub-divisions.1 

Sec.  21. — Form  of  Bond  and  Liability  in  General. 
There  is  a  marked  difference  between  the  liability  on  a 
public  official  bond  and  that  on  a  fidelity  bond.  We 
have  seen  that  a  fidelity  bond  covers  only  certain  speci- 
fied acts  on  the  part  of  the  employee,  such  as  fraud, 
dishonesty  and  the  like,2  and  that  the  bond  is  usually 
subject  to  certain  conditions  limiting  the  surety's  lia- 
bility. A  public  official  bond,  on  the  other  hand,  gen- 
erally guarantees  the  faithful  performance  by  the  offi- 
cer of  all  the  duties  required  of  him  by  law,  and  as 
a  rule  cannot  be  made  subject  to  any  restrictions  upon 
the  liability  of  the  surety.  The  surety  is  liable,  there- 
fore, not  only  for  any  public  money  the  officer  may 
convert  to  his  own  use,  but  also  for  any  loss  resulting 
from  the  failure  of  the  officer  to  perform  his  duties  or 
from  the  negligent  or  improper  manner  in  which  he 
performs  them. 

It  is  to  be  borne  in  mind,  in  this  connection,  that 
as  a  rule  it  is  not  feasible  or  useful  to  put  in  the  bond 
conditions  limiting  the  surety's  liability  as  fixed  by 

iSee  Section  1. 
2See  Section  2. 


PUBLIC  OFFICIAL  BONDS.  49 

law.  Such  a  bond  would  probably  not  be  accepted; 
and  if  it  were,  the  conditions  would  probably  be  de- 
clared void  by  the  courts.  Although  some  states  sustain 
the  validity  of  such  conditions,  most  of  them  do  not; 
and,  as  a  general  proposition,  if  a  bond  is  not  a  good 
risk  on  the  statutory  form,  it  should  not  be  issued. 

Sec.  22. — Termination  of  Liability.  The  bond  of  a 
public  officer  generally  covers  the  full  term  for  which 
the  officer  was  elected  or  appointed.  And,  inasmuch 
as  the  bond  is  a  contract  between  the  principal  and  the 
surety,  on  the  one  hand,  and  the  people  of  the  stiate, 
county  or  city,  on  the  other,  it  is  clear  that  only  the 
people,  acting  through  their  law-making  body,  can 
relieve  the  surety  of  his  obligation  during  the  term. 
The  fact  that  the  principal  may  be  willing  to  give 
another  bond,  or  that  he  may  neglect  to  pay  the  annual 
premium,  provided  for  in  his  contract  with  the  surety, 
can  have  no  effect  upon  the  surety's  liability.1 

In  some  states,  there  is  a  statute,  under  authority 
of  which,  the  surety  on  certain  public  official  bonds  may 
obtain  a  release  from  future  liability.2  Such  statutes 


iFbr  a  more  complete  discussion  of  this  point  see  Section  74. 

2ARKANSAS. — Surety  for  any  public  officer  may  petition  the 
proper  court  for  release  and  the  court,  upon  hearing,  may,  in  its  dis- 
cretion, grant  the  petition.  Sees.  7931-37,  Kirby's  Digest. 

CALIFORNIA. — Surety  for  any  city,  town,  county  or  state  offi- 
cer may  effect  a  cancellation  as  to  future  liability.  Sees.  972-77,  Po- 
litical Code 

COLORADO. — Surety  for  any  state,  county  or  municipal  officer 
may  effect  a  cancellation  as  to  future  liability.  Sec.  935,  Colorado 
Statutes  Annotated.  See  also  Sees.  4688-91,  Colorado  Statutes. 

GEORGIA. — Surety  for  any  public  officer  may  be  released  from 
future  liability  by  the  Governor  of  the  State.  Sec.  301,  Code  of 
Georgia,  1911. 

IDAHO. — Surety  on  the  official  bond  of  a  city,  district,  precinct, 
county  or  state  officer  may  effect  a  cancellation  as  to  future  liability. 
Revised  Codes,  Sees.  306-311. 

ILLINOIS.— S 
city,    village,    incoi 

cancellation  as  to ,.     _.  _., , 

P.    1563.      As    to    county    collectors,    see    also    Ch.    120,    Sec.    149, 
P.   1851. 


50  PUBLIC  OFFICIAL  BONDS. 

are  extremely  useful  when  a  risk  which  appeared  in  the 
beginning  to  be  good,  turns  out  to  be  undesirable;  and 
they  no  doubt  lessen  the  chance  of  loss. 


INDIANA. — Surety  on  any  official  bond  may  effect  a  cancellation 
as  to  future  liability.  Burn's  Anno.  St.,  Sees.  9128-33. 

IOWA. — Surety  for  any  public  officer,  deputy,  or  employee  of  such 
public  offices  or  any  officers  or  employee  of  any  public  or  private  cor- 
poration or  association  may  effect  a  cancellation  as  to  future  liability. 
Code  of  Iowa  (Supp.  1907),  Sec.  1177-b. 

KENTUCKY. — Surety  on  any  official  bond  may  effect  a  cancellation 
as  to  future  liability  and!  may  in  some  cases  obtain  indemnity  for 
such  as  may  have  been  incurred.  Sec.  4659,  Carroll's  Kentucky 
Statutes,  1909. 

LOUISIANA. — Surety  on  any  official  bond,  state  or  parochial,  may 
obtain  release  from  future  liability  if  he  alleges  that  he  has  good 
cause  to  fear  that  the  officer  will  render  him  liable  by  reason  of  mis- 
feasance, malfeasance  or  neglect  of  duty,  and  if  the  court  Is  satis- 
fied that  the  apprehensions  of  the  Surety  are  well  founded.  Act  46, 
1880,  P.  46.  Wolff's  Rev.  Laws  of  1904,  P.  1791. 

MARYLAND. — Surety  for  any  state,  county,  municipal  or  other 
public  officer  may  effect  a  cancellation  as  to  future  liability.  Art. 
90,  Sec.  7,  Annotated  Code. 

MINNESOTA. — Surety  for  county  officers  may  effect  a  cancella- 
tion as  to  future  liability.  General  Statutes,  1913,  Sees.  1083-85. 

MISSISSIPPI. — Surety  for  any  county  or  county  district  officer 
may  petition  the  Board  of  Supervisors  for  release  from  future  liability, 
and  the  board  may  order  the  officer  to  give  new  bond  and  release 
former  Surety.  Code  of  1906,  Sec.  3470. 

Surety  for  state  officer  may  effect  a  cancellation  as  to  future 
liability.  Code,  1906,  Sec.  3471. 

MISSOURI. — Surety  for  any  officer  may  be  released  from  future 
liability  by  the  court  authorized  to  take  and  approve  the  bond, 
but  the  matter  is  in  the  discretion  of  the  court.  Rev.  Statutes,  1909, 
Sees.  11281-88. 

MONTANA. — Surety  for  any  city,  town,  township,  county  or  state 
officer  may  effect  a  cancellation  as  to  future  liability.  Political  Code, 
1907,  Sees.  403-6. 

NEVADA. — Surety  on  the  official  bond  of  any  state,  county  or 
city  officer  or  on  the  bond  or  undertaking  of  any  person  where  by 
law  a  bond  or  undertaking  is  required  may  effect  a  cancellation  as 
to  future  liability.  Rev.  Laws,  1912,  Sees.  2880-82. 

OHIO. — Surety  for  sheriff,  auditor,  probate  judge,  county  treas- 
urer, Clerk  of  the  Court  of  Common  Pleas,  recorder,  coroner,  infirmary 
director  or  county  surveyor,  may  be  released  on  petition,  if  in  the 
opinion  of  the  County  Commissioners  there  is  good  reason  therefor. 
Sees.  5837-8,  Bates  Anno.  St. 

Surety  for  a  constable  or  the  marshal  of  a  municipal  corporation 
may  effect  a  cancellation  as  to  future  liability.  Sec.  5839.  Bates 
Anno.  St. 

Surety  for  treasurer  of  school  funds  may  be  released  if  in  the 
opinion  of  the  Board  of  Education  there  is  good  reason  therefor. 
Sees.  5841-2,  Bates  Anno.  St. 

Sureties  for  township  officers  may  be  released  if  in  the  opinion 
of  township  trustees  there  is  good  reason  therefor.  Sees.  5843-4, 
Bates  Anno  St. 

Surety  for  County  Commissioners  may  effect  a  cancellation  as 
to  future  liability.  Bates,  Sec.  844. 

SOUTH  CAROLINA.— Surety  of  any  officer  elected  or  appointed 
to  any  office  may  effect  a  cancellation  as  to  future  liability.  Code 
of  1902.  Sees.  597-8. 

TEXAS. — Surety  for  any  county  officer  may  effect  a  cancellation 
as    to    future    liability.      Sayle's    Civil    Statutes,    Arts.    3576-9. 
under  decree  of  a  court  may  effect  a  cancellation  as  to  future  liability. 

VIRGINIA. — Surety  for  any  officer,  or  commissioner  or  receiver 
Pollards  Code  of  1904,  Sec.  2887  2889. 


PUBLIC  OFFICIAL  BONDS.  51 

Sec.  23.— The  Underwriting  of  Public  Official 
Bonds.  We  are  now  prepared  to  take  up  the  main 
object  of  the  chapter,  namely,  the  question  when  these 
bonds  may  be  written  and  when  they  should  be  de- 
clined. In  doing  so,  we  will  follow  the  general  plan 
that  was  adopted  with  reference  to  fidelity  bonds ;  that 
is  to  say,  we  will  not  attempt  to  treat  specifically  the 
risk  on  each  different  bond  or  class  of  bonds,  but  will 
point  out  the  more  important  risks  or  chances  of  loss 
to  which  sureties  on  public  official  bonds  generally  are 
subject,  and  thereby  reduce  the  matter  to  general  prin- 
ciples, so  that  the  underwriter  may,  in  the  light  of 
those  principles  and  the  law  of  the  particular  state,  ac- 
curately determine  the  risk  in  any  particular  case. 

The  surety  on  a  public  official  bond,  like  the  surety 
on  a  fidelity  bond,  may  be  in  danger  of  loss  either 
because  of  something  in  the  personality  of  the  principal 
or  because  of  the  nature  of  the  duties  he  will  be  re- 
quired or  expected  to  perform;  and  the  subject  will 
be  treated  from  those  two  standpoints. 

Sec.  24.— The  Personality  of  the  Applicant.  In 
General.  We  have  seen  that  in  considering  the  per- 
sonality of  an  applicant  for  a  fidelity  bond,  it  is  neces- 
sary to  be  satisfied  only  that  he  is  honest,  for  the  only 


WASHINGTON. — 'Surety  on  the  official  bond  of  any  state,  county 
or  city  officer  or  on  any  bond  or  undertaking  of  any  person  where 
by  law  a  bond  or  undertaking  is  required  may  effect  a  cancella- 
tion as  to  future  liability.  Ballinger's  Code,  Sees.  1529-32. 

WEST  VIRGINIA. — Surety  on  any  official  bond  may  be  relieved 
from  future  liability.  Necessary  to  state  the  ground  upon  which  he 
believes  he  is  likely  to  sustain  pecuniary  loss,  but  action  by  court, 
board  or  officer  imperative.  Code,  1913,  Sees.  271-2. 

WYOMING. — Surety  for  treasurer  of  school  funds  may  obtain  re- 
lease from  future  liability  "if  in  the  opinion  of  the  County  Com- 
missioners there  is  good  reason  therefor."  Compiled  Statutes,  Sec. 
5027. 

Surety  for  any  state,  county  or  municipal  officer  may  effect  a 
cancellation  as  to  future  liability.  Compiled  Statutes,  Sec.  285. 


52  PUBLIC  OFFICIAL  BONDS. 

obligation  of  the  surety  is  to  see  that  the  principal 
does  not  fraudulently  misappropriate  the  money  or 
property  of  the  employer.1  But  the  surety  for  a  public 
officer  is  bound,  not  only  to  see  that  the  principal  does 
not  personally  misappropriate  any  of  the  public  money 
in  his  custody,  but  that  he  fully  performs  the  duties 
required  of  him  by  law.2  It  is  necessary,  therefore,  to 
investigate  the  personality  of  the  applicant  from  the 
standpoint  of  his  efficiency  as  well  as  his  honesty. 

Sec.  25. — Honesty.  In  attempting  to  ascertain 
whether  or  not  an  applicant  for  a  public  official  bond 
is  personally  honest,  the  same  general  principles  will 
apply  as  in  the  case  of  fidelity  applications,  and  refer- 
ence is  made  to  the  appropriate  sections.3  However,  it 
is  not  always  practicable  to  require  a  complete  record  of 
the  past  employment  of  the  applicant,  so  that  the  only 
available  sources  of  information  are  the  applicant 
himself,  the  persons  to  whom  he  refers,  and  such 
personal  knowledge  as  the  surety  company's  representa- 
tive may  have  or  may  be  able  to  get  from  outside 
sources. 

In  making  the  investigation  through  the  references, 
the  suggestions  that  have  been  made  regarding  fidelity 
applications  will  be  applicable.4  But  the  most  reliable 
information  is  not  to  be  obtained  from  the  references, 
who  are  likely  to  be  the  applicant's  close  personal  and 
political  friends.  In  the  course  of  political  campaigns, 
the  record  of  the  candidates  generally  becomes  public 


iSee  Section  2. 
2See  Section  21. 
sSee  Sections  5-7. 
*See  Section  8. 


PUBLIC  OFFICIAL  BONDS. 


53 


property,  so  that  if  the  surety's  representative  is 
"alive"  he  will  not  have  to  rely  upon  the  statements  of 
applicant's  friends,  but  will  have  the  views  of  his  politi- 
cal enemies  as  well.  There  is  really  no  excuse  for  ignor- 
ance on  the  part  of  an  agent  as  to  the  standing  of  an 
elected  officer;  and  appointees  to  offices  of  any  import- 
ance are  generally  well  known  too,  so  that  by  making 
inquiries  here  and  there,  reliable  information  can  be 
obtained  without  depending  upon  the  references. 

Sec.  26. — Efficiency.  We  have  seen  that,  because 
the  surety  for  a  public  officer  is  liable  for  the  faithful 
performance  by  him  of  his  duties,  it  is  necessary  to 
be  satisfied  that  he  is  reasonably  qualified  to  perform 
the  duties  of  the  office.  It  is  not,  of  course,  necessary 
that  he  should  be  familiar  with  the  details  of  the  parti- 
cular office,  nor  that  he  shall  have  been  trained  in  that 
particular  work.  But,  as  a  general  proposition,  where 
a  man  is  taken  directly  from  the  farm  or  the  workshop, 
with  no  training  in  business  or  in  accounting,  and  put 
in  charge  of  a  public  office  where  he  will  have  large 
sums  of  money  to  handle,  or  other  duties  for  which  he 
has  had  no  training,  the  result  is  not  likely  to  be  satis- 
factory. His  business  methods  are  apt  to  be  so  lax, 
and  his  books  kept  in  such  poor  shape,  that  it  will  be 
difficult  for  him  to  tell  where  he  stands.  He  is  likely 
to  get  personal  and  public  funds  mixed,  and,  inadvert- 
ently perhaps,  to  use  some  of  the  latter  for  himself, 
and  he  is  likely  to  make  errors  of  one  kind  or  another 
resulting  in  the  loss  of  public  money,  for  which  he  will 
be  held  accountable.  The  matter  is  a  very  important 
one,  for  it  is  well  known  that  public  officers  are  selected 


54  PUBLIC  OFFICIAL  BONDS. 

much  less  for  their  fitness  than  for  their  popularity 
or  political  influence. 

Large  and  important  offices  are  generally  filled  by 
men  of  intelligence  and  a  fair  business  training;  and 
moreover,  in  such  offices  there  is  usually  a  deputy  upon 
whom  the  actual  management  of  the  office  falls,  and 
who  has  been  holding  office  from  term  to  term  and  is 
thoroughly  qualified.  The  principal  danger  from  in- 
efficiency lies  in  the  smaller  offices  in  the  country,  where 
a  man  with  little  or  no  education  and  absolutely  no  cleri- 
cal experience  is  elected  or  appointed  to  fill  an  important 
office  such  as  county  treasurer,  tax  collector,  or  sheriff. 

It  is  difficult  to  say  when  it  is  necessary  to  decline 
an  application  because  of  the  supposed  inefficiency  of 
the  applicant.  The  most  that  can  be  done  here  is  to 
call  attention  to  the  point,  and  to  suggest  that  a  bit 
of  common  sense  be  used,  taking  into  account  the  duties 
and  liabilities  incident  to  the  office1  and  considering 
whether  the  applicant  has  the  experience  and  training 
thati  will  reasonably  fit  him  to  fulfil  those  duties  and 
protect  himself  against  the  liabilities. 

Sec.  27. — Financial  Resources.  If  an  applicant 
happens  to  be  well  fixed  financially,  that  fact  will,  of 
course,  operate  in  his  favor  in  the  consideration  of  his 
application,  as  a  man  who  has  something  to  lose  can 
generally  find  a  way  to  conduct  his  office  so  as  not  to 
subject  himself  to  any  liability.  However,  the  appli- 
cation should  first  be  considered  entirely  apart  from 
the  question  of  the  financial  worth  of  the  applicant. 


iSee  Sections  28-40. 


PUBLIC  OFFICIAL  BONDS.  55  ^  *' 

If  a  careful  investigation  shows  him  to  be  honest  and 
qualified  to  fulfill  the  duties  and  obligations  of  the 
particular  office,  the  risk  may  be  accepted  regardless  /,/ 


of  his  financial  worth.  It  is  only  where  the  applicant 
does  not  strictly  measure  up  to  the  requirements  that 
his  finances  are  to  be  considered.  However,  if  a  man 
does  not  appear  to  be  reasonably  free  from  suspicions 
of  dishonesty,  a  surety  company  ought  not  to  go  on  his 
bond,  even  though  he  may  be  reputed  to  have  money. 
But  where  the  defect  lies  in  the  question  of  his  ability 
to  fill  the  office,  then  the  fact  that  he  is  worth  a  sub- 
stantial sum  may  be  permitted  to  turn  the  scales  in 
his  favor.  In  view,  however,  of  the  fact  that  a  man's 
net  worth  is  difficult  to  ascertain  and  that  men  often 
live  and  act  as  if  they  are  well  fixed  when  they  are 
in  debt,  the  supposed  wealth  of  an  applicant  should 
not  be  given  too  much  weight. 

Sec.  28.—  The  Nature  of  the  Office.  In  General. 
In  order  to  determine  whether  or  not  an  applicant  has 
the  proper  qualifications  for  the  office  in  question,  it  is 
necessary  to  consider  the  nature  and  extent  of  the 
duties  of  tthe  office,  as  well  as  the  opportunities,  tempta- 
tions and  liabilities  to  which  the  applicant  will  be  sub- 
ject. In  treating  the  matter  here,  we  will,  in  accord- 
ance with  the  plan  previously  outlined,  make  no  attempt 
to  enumerate  the  duties,  liabilities,  opportunities  and 
temptations  of  each  particular  office,  or  even  of  each 
particular  class,  but  will  treat  these  matters  with  refer- 
ence to  public  offices  generally,  so  that  the  underwriter 
may  be  aware  of  the  possible  dangers  and  lookout  for 
them  in  each  case.  Reference  will  be  made  especially 


, 
( 


56  PUBLIC  OFFICIAL  BONDS. 

to  those  hazards  which  the  surety  may  have  an  op- 
portunity, before  signing  the  bond,  to  make  arrange- 
ments to  lessen  or  avoid. 

Sec.  29. — Opportunities,  Temptations  and  Liabilities. 
In  General.  In  determining  the  hazard  on  a  public 
official  bond,  from  the  standpoint  of  the  character  of 
the  office,  the  first  thing  that  naturally  presents  itself 
for  consideration  is  the  nature  and  extent  of  the  oppor- 
tunities and  temptation  that  will  be  afforded.  Gen- 
erally, these  elements  are  present  in  direct  propor- 
tion to  the  amount  of  money  the  officer  will  handle,  the 
ease  with  which  it  could  be  converted  to  his  own  use, 
and  the  probability  that  a  conversion  could  be  con- 
cealed for  a  considerable  length  of  time.  The  matter 
will  be  treated  from  these  three  viewpoints,  and  then 
we  will  take  up  the  matter  of  liabilities. 

Sec.  30. — The  Amount  of  Money  to  be  Handled. 
It  is,  of  course,  apparent  that  the  opportunity  of  a  pub- 
lic officer  to  misappropriate  public  money,  and  the 
temptation  to  do  so,  are  in  direct  proportion  to  the 
amount  of  money  he  will  handle  and  the  amount  he 
will  have  on  hand  at  any  one  time.  Likewise  the  chance 
of  loss  as  a  result  of  the  negligence  or  incompetence 
of  the  applicant  or  the  acts  of  his  clerks  or  third  per- 
sons is  in  proportion  to  the  amount  of  money  to  be 
handled  and  the  amount  likely  to  be  on  hand  at  one 
time. 

While  it  is  hardly  ever  necessary  to  decline  an 
application  merely  because  the  applicant  will  have  the 
custody  of  large  sums  of  money,  yet,  where  the  amount 
is  large,  it  becomes  the  more  essential  to  make  ade- 


PUBLIC  OFFICIAL  BONDS.  57 

quate  and  proper  provision  for  its  safe  keeping;1  and 
the  matter  of  the  efficiency  of  the  applicant  becomes 
more  important.2 

Sec.  31.— The  System  of  Checks.  The  next  point 
for  consideration  is  the  ease  or  difficulty  with  which  the 
applicant  could  convert  public  money  to  his  own  use. 
It  is,  of  course,  very  seldom,  if  ever,  possible  to  so  ar- 
range matters  that  an  officer  having  the  custody  of 
public  money  could  not  convert  it,  buti  anything  that 
tends  to  check  the  freedom  with  which  he  could  do  so, 
without  being  immediately  discovered,  is  a  safeguard. 
Where  the  bulk  of  the  money  that  comes  into  the 
office  is  in  cash,  and  where  the  case  is  directly  handled 
by  the  officer  himself,  and  is  disbursed  on  his  sole 
order,  the  opportunity  is  greatest.  And  the  oppor- 
tunity is  lessened  to  the  extent  that  the  money  is 
paid  into  the  office  by  checks  so  drawn  that  the  officer 
will  likely  have  to  deposit  them  to  the  credit  of  the 
state,  county  or  city,  as  the  case  may  be;  to  the 
extent  that  the  money  is  handled,  not  by  the  officer 
himself,  but  by  deputies  and  clerks,  who  are  bonded; 
and  to  the  extent  that  counter-signature  is  necessary 
in  order  to  withdraw  money  from  the  depositories. 

It  is  not  always  necessary  for  a  surety  under- 
writer to  accept  or  reject  an  application  as  it  stands, 
as  the  suggestions  of  a  surety  company  looking  to  an 
improved  systems  of  checks  are  often  welcomed  and 
adopted.  The  checks  above  named,  and  any  others 
that  may  suggest  themselves  in  particular  cases  should 


iSee  Sections  35-37. 
2See  Section  26. 


58  PUBLIC  OFFICIAL  BONDS. 

be  applied  as  far  as  possible;  and  if  the  checks  that 
will  be  applied  are  not  reasonably  efficient,  then  the 
requirements  as  to  the  personality  of  the  applicant 
must  be  strictly  enforced 

Sec.  32.— Ease  or  Difficulty  of  Concealing  Short- 
age. It  is  seldom  that  an  officer  misappropriates  pub- 
lic money  if  he  knows  or  has  every  reason  to  believe 
the  defalcation  will  soon  be  discovered.  He  generally 
yields  to  the  temptation  either  under  the  assumption 
that  he  will  be  able  to  pay  it  back  before  the  shortage 
is  discovered  or  that  he  can  conceal  the  shortage  so 
effectually  that  it  will  not  be  discovered  at  all. 

Where  there  is  to  be  no  audit  of  the  office  there  is 
little  or  no  difficulty  in  concealing  a  shortage;  and 
almost  any  officer  who  handles  money  could,  under 
those  circumstances,  take  some  of  it  without  being 
discovered  until  the  end  of  his  term.  But  the  op- 
portunity to  conceal  differs  in  different  cases,  and  in 
each  case  the  circumstances  should  be  noted  in  the 
light  of  the  following  principles: 

A.  The  opportunity  is  lessened  where  the  officer 
is  required  periodically  to  account  for  and  pay  over 
the  balance  in  hand  and  is  not  permitted  to  continue 
throughout  his  term  to  retain  all  public  money  re- 
ceived less  that  expended.  There  may  be  nothing  to 
prevent  him  from  neglecting  to  account  for  some  of 
the  money,  but  the  fact  that  an  accounting  is  neces- 
sary is  a  safeguard;  and  if  the  accounting  is  required 
with  reasonable  frequency,  say  once  a  year,  and  is  re- 
quired to  be  in  full  of  all  funds  received  to  date,  the  bond 
may  be  written  without  regard  to  the  financial  worth 


PUBLIC  OFFICIAL  BONDS.  59 

of  the  applicant,  so  long  as  his  personality  is  up  to 
the  standard.1    But  where  no  such  accounting  nor  any 
satisfactory  audit  is  to  be  made,  it  is  generally  best  to 
decline  the  business  unless  the  applicant  has  some  fi-  - 
nancial  responsibility, — at  least  equal  to  one  fourth  the    i  ^ 
penalty  of  the  bond.     This,  however,  may  be  waived 
where  the  personality  of  the  applicant  is  in  all  respects 
up  to  the  highest  standard. 

B.  Where,    although    he    is    required    to    make 
annual  accountings,  yet,  before  he  is  required  to  ac- 
count for  the  first  annual  fund,  he  begins  to  receive 
the  second,  so  that  a  defalcation  out  of  the  first  year's 
fund  could  be  made  up  out  of  the  second,  tihe  good 
effect  of  the  accounting  is  nullified.     This  principle 
is  illustrated  in  the  case  of  tax  collectors,  where  they 
are  not  required  to  account  in  full  for  the  taxes  col- 
lected during  one  year  until  after  they  begin  to  collect 
for  another  year.     Such  an  officer  could  carry  along 
a  shortage  for  an  indefinite  period,  and  the  matter  should 
be  considered  just  as  if  no  accounting  were  required. 

C.  Likewise,  where  the  officer  is  the  collector  or 
custodian  of  two  or  more  different  funds  and  is  not 
required  to  account  for  all  the  funds  at  the  same  time, 
so  that  he  could  use  the  balance  of  one  to  pay  up  the 
other,  the  good  effect  of  the  accounting  is  nullified. 
This  is  illustrated  in  the  case  of  tax  collectors  who,  for 
example,    collect   county   and   school   taxes   and   make 
their  accounting  for  school  taxes  at  one  time  and  for 
county  taxes  at  another,  so  that  they  could  use  second 
year's  collection  of  one  to  make  up  a  shortage  in  the 


iSee  next  section. 


60  PUBLIC  OFFICIAL  BONDS. 

first  year 's  collection  of  the  other.  In  all  such  cases,  the 
matter  should  be  treated  just  as  if  no  accounting  were 
required. 

D.  The  opportunity  is  lessened  where,  though 
the  officer  is  not  required  to  account,  there  are  certain 
times  during  the  year  when  the  expenditures  will 
nearly  equal  the  receipts,  so  that  there  will  be  only 
a  nominal  balance  in  hand.  In  that  event  the  officer 
cannot,  without  being  discovered,  take  more  than  an 
amount  equal  to  this  balance.  Inasmuch,  however, 
as  the  size  of  this  balance  cannot  be  definitely  known 
in  advance,  and  may  be  quite  large,  it  is  not  well  to 
put  much  dependence  in  tihis  supposed  safeguard. 

Sec.  33. — Frequency  ajid  Efficiency  of  Audits.  As 
a  matter  of  fact  public  officers  do  not  generally  have 
such  unrestricted  opportunities  and  temptations  as 
those  outlined  in  the  last  section.  In  nearly  all  states, 
counties  and  cities  there  is  an  auditor  of  public  ac- 
counts who  is  expected  at  certain  intervals  to  audit 
and  examine  the  different  public  offices  under  his  juris- 
diction. This  is  an  important  safeguard,  for  it  is  sel- 
dom, that  a  public  officer  misappTOpriates  a  large 
sum  at  one  time.  He  generally  begins  by  using 
small  amounts  with  the  intention  perhaps  of  re- 
placing the  money  at  the  first  convenient  oppor- 
tunity. If,  therefore,  any  peculations  of  an  officer 
are  likely  to  be  discovered  by  an  auditor  soon  after 
they  have  started,  the  risk  of  the  surety  is  greatly 
lessened,  for  the  probability  of  discovery  operates  not 
only  to  prevent  large  losses,  but  is  instrumental  in 
preventing  any  loss. 


PUBLIC  OFFICIAL  BONDS.  61 

In  considering  applications  for  bonds  of  officers 
who  handle  public  money,  investigation-  ought  to  be 
made  to  ascertain  if  there  is  an  auditor  in  the  particular 
jurisdiction,  how  frequently  the  particular  office  will 
be  audited,  and  the  standing  of  the  auditor  and  his 
reputation  for  efficiency.  If  there  is  no  auditor,  or 
if  efficient  audits  will  not  be  made  at  least  once  a  year, 
the  bond  should  be  written  only  if  the  personality  of 
the  officer  measures  up  tio  the  highest  standard,  or 
where  the  applicant  has  considerable  financial  respon- 
sibility, at  least  equal  to  one  fourth  the  penalty  of  the 
bond. 

Poor  audits  may  be  the  result  of  the  fact,  that 
the  law  does  not  give  the  auditor  full  power  and 
authority  to  make  the  audits  or  does  not  provide  the 
requisite  clerical  assistance;  that  the  auditor  has 
not  the  requisite  ability;  or  that  he  belongs  to  the 
same  clique  of  politicians  as  the  officer  whose  accounts 
he  is  to  examine,  and  may  therefore  fail  to  discover 
evident  irregularities  for  fear  of  its  "effect  upon  the 
party.'*  These  several  aspects  of  the  matter  should 
be  considered  in  each  case. 

In  considering  the  probable  efficiency  of  an  audit, 
it  is  well  to  bear  in  mind  any  special  difficulties  there 
may  be  in  making  an  accurate  check.  Where  for  ex- 
ample, the  officer  is  the  collector  or  custodian  of  two 
or  more  different  funds,  each  of  which  will  be  audited 
by  a  different  auditor  at  a  different  time,  the  officer 
could  exhibit  the  same  money  as  the  balance  of  each 
fund,  so  that  a  shortage  would  not  necessarily  be  dis- 
covered. It  is  necessary  that  a  complete  audit  of  all 


62  PUBLIC  OFFICIAL  BONDS. 

the  funds  be  made  at  one  time  and  that  the  officer  bo 
required  to  show  at  the  one  time  the  total  or  aggre- 
gate balance  of  all  the  funds.  If  this  is  not  to  be 
done,  the  audits  will  not  amount  to  anything  and 
should  not  be  considered. 

So  also  where  it  is  difficult  or  impossible  to  tell 
what  funds  have  come  into  the  hands  of  the  officer, 
an  audit  will  not  be  effective.  This  is  true  to  a 
greater  or  less  extent  in  practically  all  cases,  and 
shows  the  importance  of  not  relying  too  much  on 
audits ;  and,  in  some  cases,  an  audit  is  of  no  value  what- 
ever. Take  the  case,  for  example,  of  a  tax  collector 
who  is  not  required  to  account  fully  for  the  first  year's 
taxes  before  beginning  to  collect  for  the  second  year. 
It  is  generally  an  easy  matter  in  that  case  for  a  collector, 
who  is  short,  to  deceive  the  auditor  by  reporting  that 
he  has  not  collected  certain  taxes  which  in  fact  he 
has  collected. 

In  general,  it  may  be  said  where  it  is  not  possible 
to  check  the  receipts  of  the  officer,  it  is  not  well  to  put 
any  dependence  in  an  audit. 

Some  companies  deem  it  profitable  to  have  their 
own  auditors  go  out  periodically  and  audit  the  accounts 
of  the  public  officers  whom  they  have  bonded,  and  veri- 
fy the  cash  balance.  Such  a  checking  no  doubt  pre- 
vents many  losses,  but  it  is  expensive,  and  other  com- 
panies, realizing  that  audits  are  not  always  effective 
to  prevent  losses,  think  it  more  profitable  to  be  more 
conservative  in  underwriting  and  to  pay  the  losses  that 
might  be  saved  by  the  audits.  We  are  not  concerned 
here  with  the  advisability  of  making  such  audits.  The 


PUBLIC  OFFICIAL  BONDS.  63 

point  is  that  such  audits  are  likely  to  be  at  least  as 
effective  as  audits  by  public  auditors,  so  that  where 
private  audits  will  be  made,  the  underwriters  do  not 
have  to  concern  themselves  so  much  with  audits  at  pub- 
lic expense. 

Sec.  34.— Where  Applicant  Held  the  Office  During 
the  preceding  Term.  Where  an  officer  serves  for  two 
or  more  successive  terms,  and  has  a  bond  with  different 
sureties  for  each  term,  the  sureties  on  the  bond  for  the 
last  term  are  liable  for  all  money  in  the  hands  of  the 
officer  at  the  time  of  the  execution  of  the  bond;  and 
it  will  be  presumed  that  the  principal  had  in  his  hands, 
at  that  time,  all  the  money  thati  he  ought  to  have  had. 
In  other  words,  where  an  officer  is  short  at  the  end  of 
his  first  term  and  applies  moneys  coming  into  his  hands 
during  the  second  term  to  the  payment  of  that  defalca- 
tion, the  surety  on  the  second  bond  will  be  held  liable 
for  the  defalcation  thus  made  during  the  second  term. 

It  appears  not  to  be  difficult  for  public  officers  to 
conceal  a  shortage;  and  therefore,  when  a  new  surety 
goes  in  for  a  second  term,  he  may  not  only  be  bonding 
a  man  who  has  defaulted,  and  who  therefore  may  be 
expected  to  do  so  again,  but  actually  assuming  liability 
for  an  existing  shortage.  As  a  rule,  therefore,  hold- 
overs who  handle  money  are  and  should  be  on  the  pro- 
hibited list,  and  the  prohibition  should  not  be  waived 
unless  the  applicant  is  worth,  in  net  available  assets, 
an  amount  at  least  equal  to  half  the  penalty  of  the  bond, 
or  unless  there  is  convincing  evidence  that  there  is  no 
existing  default.  The  evidence,  as  to  the  correctness 
of  the  accounts,  should  be  based  on  a  genuine  audit  of 


64  PUBLIC  OFFICIAL  BONDS. 

the  books  and  accounts  of  tthe  officer  by  an  expert  ac- 
countant and  an  actual  verification  of  the  cash  shown 
by  the  books  to  be  on  hand.  And  it  should  be  borne 
in  mind  that  unless  it  is  practicable  to  tell  exactly  how 
much  money  has  come  into  the  office,1  the  audit  will 
not  be  satisfactory,  and  in  that  event  the  bond  should 
not  be  written  unless  the  applicant  is  worth  an  amount 
at  least  equal  to  half  the  penalty  of  the  bond. 

Sec.  35. — Liabilities — For  Loss  by  Bank  Failure, 
Let  us  now  consider  some  of  the  liabilities  to  which 
public  officers  are  subject,  and  against  which  they  and 
their  sureties  should  be  protected.  One  of  the  duties 
of  a  public  officer  is  to  account  for  and  pay  over  all 
money  that  comes  into  his  hands;  and  when  he  gives 
bond  for  the  faithful  performance  of  his  duties,  he 
and  his  surety  become  insurers  that  the  money  will  be 
paid  in  accordance  with  law;  and  generally  no  excuse, 
except  such  as  may  have  been  specifically  provided 
for  by  law,  will  avail  to  relieve  the  principal  and  surety 
of  this  responsibility.  If  therefore  the  bank  in  which 
the  officer  deposits  the  money  under  his  control  should 
fail,  the  officer  and  his  surety  would  be  liable  for  the 
resulting  loss,  notwithstanding  care  had  been  exercised 
in  the  selection  of  the  bank. 

In  recent  years,  many  states,  counties  and  cities 
have  provided  by  law  for  the  selection  of  depositories 
for  their  funds;  have  required  these  depositories  to 
give  bond  for  the  safe  keeping  and  proper  payment  of 
the  funds  on  demand;  have  required  officers  to  put 
funds  under  their  control  in  these  depositories,  and 

iSee  preceding  section. 


PUBLIC  OFFICIAL  BONDS.  65 

have  relieved  the  officers  of  liability  in  case  of  the 
failure  of  such  banks.  In  order,  however,  that  the 
officer  and  his  surety  may  be  thus  relieved,  it  is  abso- 
lutely necessary  that  the  depository  law  be  strictly 
complied  with;  that  is  to  say,  the  depositories  must 
be  selected  or  designated  in  exactly  the  manner  pointed 
out  by  the  statute,  and  they  must  give  bond  and  other- 
wise qualify  exactly  as  fixed  by  the  statute,  and  they 
must  not  have  on  deposit  at  any  one  time  an  amount 
in  excess  of  that  for  which  they  can  legally  qualify  as 
depositories  The  fact  that  strict  compliance  with  the 
law  may  have  been  waived  by  some  officer,  or  not  re- 
quired, does  not  affect  the  case;  for  the  loss  will  fall 
on  the  officer  and  his  surety  unless  every  detail  of  the 
statute  is  complied  with.1  In  this  connection,  it  should 


iThe    laws  of    the    several    states    on  this    subject  may    be  sum- 
marized briefly  as  follows : 

ALABAMA. — State  Treasurer  and  other  custodians  of  state  funds 
may  be  relieved  by  depositing  funds  in  state  depositories  designated 
by  the  Governor,  provided  the  banks  deposit  with  treasurer  regis- 
tered bonds  of  the  State  of  Alabama  equal  to  the  deposits,  and  pro- 
vided deposits  do  not  exceed  capital,  surplus  and  undivided  profits 
of  the  bank.  Code,  1907,  Sees.  641-55. 

ARKANSAS. — S\tate  Treasurer  may  be  relieved  by  depositing  funds 
in  depositories  to  be  designated  by  him  with  consent  and  approval 
of  the  Governor  and  Attorney-General,  one  depository  to  be  designated 
in  each  senatorial  district  and  the  maximum  deposit  to  be  $50,000 
and  bond  with  sureties  to  be  given  for  one  and  one-half  times  maxi- 
mum deposit.  Act  430  of  1909. 

County  Treasurers  in  Baxter,  Carroll,  Greene,  Independence,  Izard, 
Lonoke  and  Sharp  Counties  may  be  relieved  by  depositing  county 
funds,  including  school  funds,  in  depositories  designated  by  the 
county  court ;  depositories  to  give  bond  for  an  amount  not  less  than 
the  currency  revenue  for  the  preceding  year.  Act  208  of  1907  as 
amended  by  Act  258  of  1909. 

County  Treasurers  in  Benton,  White  (Act  113  of  1905),  Madison* 
Washington,  Woodruff,  Randolph,  Boone  (Acts  of  1907),  Cleburne, 
Franklin,  Logan,  Marion,  Montgomery,  Sevier,  Ouachita  and  Union 
Counties  (Acts  of  1913)  may  be  relieved  in  substantially  the  same 
way. 

Treasurer  of  St.  Francis  Levee  District  may  be  relieved  in  same 
way — the  designation  to  be  made  by  board  of  directors.  (Act  146 
of  1913.) 

Treasurer  of  City  of  Fayetteville  may  be  relieved  in  same  way — 
designation  to  be  made  by  City  Council,  (Act  309  of  1913.) 

CALIFORNIA. — State  Treasurer  may  be  relieved  by  depositing  funds 
in  banks  designated  by  him  with  the  approval  of  the  Gov- 


66  PUBLIC  OFFICIAL  BONDS. 

be  borne  in  mind  that  there  are  some  so-called  deposi- 
tory laws,  which  do  not  make  it  obligatory  upon  the 

ernor  and  Comptroller,  provided  the  banks  place  with  Treasurer  cer- 
tain specified  securities  10  per  cent,  in  excess  of  the  deposit,  to  be 
approved  by  Governor  and  Comptroller ;  and  provided  the  deposit 
in  any  bank  does  not  exceed  50  per  cent,  of  its  capital  nor  10  per 
cent,  of  the  total  amount  in  the  custody  of  the  officer  while  there 
are  other  qualified  banks.  Acts  1907,  Ch.  50. 

Treasurers  of  Counties  and  Municipalities  may  be  relieved  in  sub- 
stantially the  same  way,  securities  to  be  approved  oy  District 
Attorney  of  the  county  or  City  Attorney  for  the  municipality.  Acts 
1907,  Ch.  522. 

FLORIDA. — State  Treasurer  may  be  relieved  by  depositing  funds 
in  banks  designated  by  Governor,  Comptroller,  and  Treasurer,  pro- 
vided the  banks  deposit  with  the  Treasurer  bonds  of  the  United  States, 
the  bonds  of  the  several  states,  and  county  and  municipal  bonds,  to 
be  approved  by  the  Governor,  Comptroller  and  Treasurer.  Rev.  St. 
of  1906,  Sees.  132-137. 

Sheriffs,  Tax  Collectors,  County  Treasurers,  City  Treasurers,  Clerks 
of  Courts,  Receivers,  and  the  Treasurers  or  other  agents  of  the  State, 
or  of  the  courts  thereof  may  deposit  any  moneys  they  may  have  in 
their  custody  with  the  banks  which  shall  be  designated  oy  the  Comp- 
troller for  that  purpose  and  which  shall  give  satisfactory  security, 
by  the  deposit  of  bonds  of  the  United  States  or  of  the  State  of 
Florida,  or  other  satisfactory  security.  Rev.  St.,  1906,  Sec.  2717. 

Not  being  required  to  deposit  funds  in  those  banks,  it  is  doubtful 
if  officers  would  be   relieved. 

ILLINOIS. — City,  town  or  village  treasurers  may  be  relieved  by  de- 
positing money  in  banks  designated  by  ordinance,  provided  a  bond 
be  required  from  the  banks  in  such  penal  sum  and  with  such  security 
as  the  City  Council  or  Board  of  Trustees  shall  direct,  sufficient 
to  save  the  corporation  harmless  from  any  loss.  Rev.  St.,  1909, 
Ch.  24,  Sec.  96,  P.  353. 

INDIANA. — State  Treasurer,  County  Treasurers,  City  Treasurers, 
Town  Treasurers,  Treasurers  of  the  Boards  of  School  Commissioners 
of  school  cities,  Treasurers  of  Boards  of  School  Trustees  of  school 
cities,  Treasurers  of  Boards  of  Trustees  of  school  towns  and  Toivn- 
ship  Trustees  may  be  relieved  by  depositing  all  funds  in  their  custody 
in  the  depositories  selected  by  the  Board  of  Finance  of  the  state, 
county,  city,  town,  school  city,  school  town,  or  township,  as  the 
case  may  be,  provided  the  depositories  give  individual  bonds  25 
per  cent,  in  excess  of  the  deposit  or  surety  company  bond  equal  to  the 
deposit,  to  be  approved  by  the  proper  Board  of  Finance  or  deposit 
bonds  of  the  United  States,  the  State  of  Indiana,  or  of  a  county  or 
counties  of  said  State.  Burns'  Rev.  Statutes,  Sees.  7526-46. 

KANSAS. — ffltate  Treasurer  may  be  relieved  by  depositing  funds  in 
depositories  selected  by  the  board  of  treasury  examiners,  consisting 
of  the  Governor,  Secretary  of  State  and  State  Auditor,  provided  that 
no  bank  shall  have  on  deposit  more  than  50  per  cent,  of  its  capital 
nor  more  than  $100,000,  and  provided  further  that  each  depository 
deposits  with  the  State  Treasurer  bonds  of  the  United  States,  of  the 
State  of  Kansas,  or  of  some  county,  school  district  or  municipality 
of  the  state  equal  to  the  amount  of  funds  to  be  deposited.  General 
Statutes,  1909,  Sees.  8813-22. 

County  Treasurers  may  be  relieved  by  depositing  funds  in  deposi- 
tories designated  by  the  County  Commissioners,  provided  the  deposi- 
tories give  bond  in  a  sum  double  the  largest  approximate  amount 
to  be  deposited  at  any  one  time,  if  a  personal  bond ;  or  equal 
to  the  deposit,  if  a  surety  company  bond.  Gen.  St.,  1909,  Sec.  2163. 

Treasurers  of  cities  of  the  first-class  (over  15,000  population)  may 
be  relieved  by  depositing  funds  in  banks  designated  by  the  Mayor 
and  Council,  provided  the  banks  give  bond  with  surety,  in  a  sum  to 
be  designated  by  the  Council.  Gen.  St.,  1909,  Sec.  951. 

Treasurers  of  cities  of  the  second  (2.000  to  15,000)  and  third 
(tmder  2,000)  class,  the  Treasurer  of  the  Board  of  Education  of  cities 
of  the  second-class  and  the  Treasurer  of  the  School  Board  of  any 
district  in  which  there  is  a  city  of  the  third-class  may  be  relieved 
by  depositing  funds  in  a  bank  or  banks  designated  by  the  Mayor  and 


PUBLIC  OFFICIAL  BONDS.  67 

officers  to  put  the  money  in  the  designated  banks,  and, 
therefore,  do  not  relieve  them  of  their  ordinary  lia- 

Councilmen,  or  in  the  case  of  school  funds,  by  the  Board  of  Education 
or  School  Board,  as  the  case  may  be;  provided  the  depositories  give 
bond  with  individual  sureties  in  a  sum  double  the  largest  approxi- 
mate amount  that  may  be  on  deposit  at  any  one  time  or  a  surety 
company  bond  equal  to  the  largest  amount.  Gen.  St.,  Sec.  851. 

LOUISIANA. — State  Treasurer  may  be  relieved  by  depositing  funds 
with  the  fiscal  agents  of  the  State  (Wolff's  Rev.  Law,  1904,  Sec. 
3773),  which  are  designated  by  the  State  Board  of  Liquidation. 
Wolff's  Rev.  Laws,  1904,  P.  1772. 

MICHIGAN. — County  Treasurers  may  be  relieved  by  depositing  funds 
in  banks  designated  by  the  Board  of  Supervisors,  or  the  Board 
of  County  Auditors,  in  counties  having  a  board  of  county  auditors — 
such  banks  to  give  bond  in  an  amount  at  least  equal  to  the  maximum 
amount  to  be  deposited  and  with  sureties  to  be  approved  by  the 
board  and  the  prosecuting  attorney.  Howell's  Statutes,  Sees.  1048-53. 

Treasurers  o/  cities  of  the  fourth-class  may  be  relieved  by  deposit- 
ing all  money  in  banks  designated  by  the  council ;  such  banks  to  fur- 
nish a  bond,  as  the  council  may  require  and  approve.  Howell's 
Statutes,  Sec.  5555. 

Treasurer  of  any  incorporated  village  may  be  relieved  by  deposit- 
ing all  public  money  in  depositories  designated  by  the  legislative 
body,  such  banks  to  give  bond  to  be  approved  by  the  council  in 
a  sum  equal  to  the  maximum  amount  to  be  deposited ;  provided  there 
be  not  deposited  in  any  bank  an  amount  in  excess  of  its  capital  and 
surplus,  nor  more  than  $200,000.  Howell's  Statutes,  Sec.  6355. 

Township  Treasurers  may  be  relieved  by  depositing  public  money 
in  depositories  designated  by  the  Township  Board,  said  depositories 
to  give  bond  to  be  approved  by  the  board  in  an  amount  equal  to 
the  penalty  of  the  bond  furnished  by  the  Treasurer,  but  Treasurer 
is  liable  for  any  loss  occasioned  by  deposits  in  excess  of  the  amount 
of  the  bond.  Howell's  Statutes,  Sec  1408. 

MINNESOTA. — State  Treasurer  may  be  relieved  by  depositing  funds 
in  banks  designated  by  the  Board  of  Deposit,  provided  the  banks 
deposit  securities  or  give  bond :  if  personal  sureties,  hi  double  the 
amount  to  be  deposited ;  if  corporate  surety,  equal  the  amount  to 
be  deposited.  Gen.  St.,  1913,  Sees.  93-99. 

County  Treasurer  may  be  relieved  by  depositing  funds  in  banks 
designated  by  the  Board  of  Auditors,  provided  the  banks  deposit 
securities  or  give  bond  as  in  the  case  of  state  depositories.  Gen. 
St.,  Sees.  847-57. 

City  Treasurers  may  be  relieved  by  depositing  funds  in  banks 
designated  by  the  City  or  Common  Council,  provided  no  bank  re- 
ceives more  than  25  per  cent,  of  its  capital  and  surplus  and  pro- 
vided all  banks  give  bond  for  double  the  amount  likely  to  be  re- 
ceived. Gen.  St.,  Sees,  1391-96. 

Town  Treasurers  may  be  relieved  by  depositing  funds  in  a  bank 
designated  by  the  Town  Board,  provided  a  bond  in  douoie  the  amount 
of  the  deposit  be  given.  Gen.  St.,  Sec.  1142. 

Village  Treasurers  may  be  relieved  by  depositing  funds  in  banka 
designated  by  the  council,  provided  the  banks  give  bond  In  double 
the  amount  to  be  deposited.  Gen.  St.,  Sec.  1796. 

Treasurers  of  Common  and  Independent  School  Districts  may  be 
relieved  by  depositing  funds  in  banks  designated  by  the  School  Board, 
the  banks  to  give  bond  as  in  the  case  of  state  depositories.  Gen. 

MISSISSIPPI  —State  Treasurer  may  be  relieved  by  depositing  funds 
in  depositories  designated  by  the  Governor,  the  Attorney-General  and 
himself  annually  on  the  first  of  February— the  depositories  to  place 
with  the  Treasurer  certain  named  securities  or  bonds  of  a  s 
comnanv  in  a  sum  10  per  cent,  in  excess  of  the  amount  the  depository 
Is  authorized  to  receive;  and  no  bank  is  authorized  to  receive  more 
than  35  per  cent,  of  the  amount  for  which  the  bank  was  assessed 
for  State  taxes  the  preceding  year.  Laws,  1908,  Ch.  96,  as  amended 
by  Laws,  1910,  Ch.  224. 


68  PUBLIC  OFFICIAL  BONDS. 

bility.    These  laws  have  not  been  referred  to  in  the 
note. 


County  Treasurers  may  be  relieved  by  depositing  funds,  including 
funds  of  any  drainage  district,  in  banks  designated  oy  the  Board 
of  Supervisors  annually  in  November,  the  depositories  to  place  with 
the  Treasurer  securities  or  a  surety  company  bond  for  a  sum  10  per 
cent,  in  excess  of  the  maximum  deposit.  Acts  1910,  Ch.  137. 

City  and  Town  Treasurers  may  be  relieved  by  depositing  all  funds 
in  banks  designated  by  Mayor  and  Alderman  or  other  municipal 
authorities,  in  the  same  manner,  and  subject  to  same  conditions 
as  provided  in  the  case  of  county  depositories.  Acts  1910,  Ch.  138. 

Treasurer  of  the  Board  of  Commissioners  for  the  Yazoo  Mississippi 
Delta  may  be  relieved  by  depositing  all  funds  in  banks  designated  by 
the  commissioners ;  the  banks  to  be  designated  for  term  of  two  years 
and  to  deposit  securities  equal  to  50  per  cent,  of  the  estimated  maxi- 
mum deposit  and  bond  with  sureties  equal  to  75  per  cent.  Acts 
1908,  Ch.  97. 

MISSOURI. — State  Treasurer  may  be  relieved  by  depositing  all  funds 
in  depositories  selected  by  him,  with  the  approval  of  the  Governor  and 
Attorney-General,  after  advertisement,  the  banks  to  deposit  with  Treas- 
urer securities  equal  to  the  amount  on  deposit  and  in  addition  a  bond 
with  sureties  equal  to  25  per  cent,  of  the  deposit,  all  to  be  approved 
by  the  Governor  and  Attorney-General.  R.  S.,  1909,  Sees.  11876-85. 

County  Treasurers  may  be  relieved  by  depositing  county  funds,  in- 
cluding school  funds,  in  banks  designated  by  the  county  court  bienni- 
ally,— (the  banks  to  give  bond  with  surety  to  be  approved  by  the  County 
Court.  Rev.  St.  1909 — Sees.  3803-17. 

Treasurers  of  Cities  of  350,000  or  more  may  be  relieved  by  deposit- 
ing all  funds  in  banks  selected  annually  by  Mayor,  Comptroller  and 
Treasurer, — the  banks  to  give  bond  with  surety  for  $500,000;  and  if 
deposit  exceeds  that  amount,  additional  bonds  to  be  given,  but  not 
more  than  one  million  dollars  to  be  deposited  in  any  one  bank.  R.  S. 
Sec.  9858. 

Treasurers  of  Cities  of  the  first  class  (100,000  or  more)  may  be  re- 
lieved by  depositing  all  funds  in  banks  designated  by  the  Common 
Council  biennally  after  advertisement, — the  banks  to  give  bond  in 
double  the  highest  estimated  amount  of  deposits  during  any  month. 
E.  S.  Sec.  8585. 

Treasurers  of  Cities  of  the  second  class  (30,000  to  100,000)  may  be 
relieved  by  depositing  all  funds  in  a  bank  designated  by  the  City 
Council  biennally  after  advertisement,  the  banks  to  give  bond  equal  to 
the  estimated  revenues  for  the  current  fiscal  year.  Sees.  107-9,  of  an 
Act  approved  March  25th,  1913.  P.  469-70. 

Treasurers  of  Cities  of  the  third  class  (3,000  to  30,000)  may  be  re- 
lieved by  depositing  all  funds  in  a  bank  selected  by  the  City  Council  in 
July  of  each  year, — the  bank  to  give  bond  at  least  double  the  revenues 
of  the  city  for  the  year.  R.  S.  Sees.  9217-19. 

Treasurers  of  Cities  of  the  fourth  class  (500  to  3,000)  may  be  re- 
lieved by  depositing  funds  in  a  bank  designated  by  the  Board  of  Al- 
derman "for  such  length  of  time  and  under  such  rules  and  regulations 
as  may  be  prescribed  by  ordinance."  Acts,  1911,  p.  341. 

Treasurers  of  Eleemosynary,  Educational  or  Penal  Institutions  may 
be  relieved  by  depositing  funds  ip.  banks  selected  by  the  Board  of 
Managers, — the  banks  to  give  bond  equal  to  the  largest  amount  to  be 
on  hand  to  be  fixed  by  the  board.  Acts  1911,  p.  116. 

Treasurers  of  Boards  of  Tuberculosis  Hospital  Commissioners  may 
be  relieved  by  depositing  all  funds  in  a  bank  annually  selected  by  the 
board.  Acts  1911,  p.  131. 

MONTANA. — State  Treasurer  to  deposit  all  funds  in  banks  to  be 
designated  by  him,  banks  to  give  security  to  be  approved  by  State 
Board  of  Examiners.  Doubtful  if  Treasurer  relieved1.  Rev.  Codes, 
1907,  Sec.  183. 

County  Treasurers  may  be  relieved  by  depositing  funds  in  banks 
designated  by  County  Commissioners,  the  banks  to  give  securities  or 
indemnifying  bonds  to  be  approved  by  County  Commissioners.  Rev. 
Codes.  1907,  Sec.  3003,  as  amended  by  Ch.  88  of  Acts  1913. 

City  and  Town  Treasurers  may  be  relieved  by  depositing  funds  in 
banks"  selected  by  the  Council,  banks  to  give  such  security  or  indemni- 


PUBLIC  OFFICIAL  BONDS.  69 

If  there  is  no  law  which  provides  public  depositor- 
ies and  relieves  the  officer  of  depository  liability,  or  if 


fylng  bonds  as  Council  may  approve.  Sec.  3257  of  Code,  1907,  aa 
amended  by  Ch.  88  of  Acts  of  1913. 

NEBRASKA. — State  Treasurer  may  be  relieved  by  depositing  all 
funds  in  banks,  which  shall  give  bond  to  be  approved  by  the  Governor, 
Secretary  of  State  and  Attorney-General,  but  the  Treasurer  is  not  to 
have  on  deposit  in  any  bank  more  than  the  amount  of  the  bond,  if  the 
surety  is  a  corporation,  nor  more  than  half  the  amount  of  the  bond, 
If  the  sureties  are  individuals,  nor  more,  in  any  event,  than  30  per 
cent,  of  the  bank's  capital  stock.  In  lieu  of  bonds  with  surety,  the 
banks  may  deposit  certain  securities  named  in  the  statute.  Cobbeys 
Anno.  St.  1911.  Sees.  11364-68. 

County  Treasurers  may  be  relieved  in  the  same  way  except  that 
Treasurers  may  deposit  in  any  one  bank  an  amount  equal  to  50  per 
cent,  of  its  capital.  Bonds  or  securities  to  be  approved  oy  the  County 
Board.  Cobbeys  Anno.  St.  Sees.  11369-74. 

Treasurers  of  Cities  of  5,000  to  25,000  may  be  relieved  by  deposit- 
Ing  all  funds  in  banks,  which  shall  give  bond  to  be  approved  by  the 
Mayor  and  filed  with  the  Clerk ;  but  the  Treasurer  is  not  to  deposit  in 
any  one  bank  more  than  one  half  of  the  amount  of  the  bond  nor  more 
than  20  per  cent,  of  the  bank's  capital.  Cobbeys  Anno.  St.  Sees. 
8637-39. 

Treasurers  of  Cities  of  25,000  to  40,000  may  be  relieved  by  deposit- 
Ing  all  funds  In  banks  designated  by  the  Council,  the  banks  to  give 
bond  to  be  approved  by  the  Mayor  and  Council ;  but  no  such  deposit  is 
to  be  made  in  any. bank  with  a  capital  of  less  $50,000  nor  for  more 
than  50  per  cent,  of  the  capital  and  surplus,  nor  for  more  than  the 
amount  of  the  bond.  Cobbeys  Anno.  St.  Sec.  8245. 

Note. — The  depositors  guaranty  law  (Act,  1909,  Ch.  10,  as  amended 
by  Act,  1911,)  provides  that  no  bank  which  has  complied  in  full  with 
all  the  provisions  of  the  Act  shall  be  required  to  give  any  further  se- 
curity or  bond  for  the  purpose  of  becoming  a  depository  for  any  pub- 
lic funds,  but  public  funds  shall  be  secured  in  the  same  manner  that 
private  funds  are  secured.  Cobbeys  Anno.  St.  3746. 

In  State  vs.  Havelone,  139  N.  W.,  636,  it  was  held  that  this  Act 
repealed  so  much  of  the  provisions  of  the  state  depository  law  as  re- 
quired the  giving  of  bonds  to  secure  the  deposits ;  and  that  any  state 
bank  could  demand  its  share  of  state  funds  without  giving  the  bonda 
required  by  the  depository  law.  It  would  seem  therefore  to  be  unnec- 
essary to  the  protection  of  the  several  classes  of  public  officers  that 
state  banks  give  the  bonds  provided  for  by  the  depository  law.  In 
other  respects  the  law  must  be  complied  with. 

NEW  JERSEY. — Any  County,  City  or  other  Municipality  is  author- 
ized to  select  as  a  depository  for  its  money  any  bank  having  its  place 
of  business  in  New  Jersey.  Comp.  St.  1910,  p.  3670.  Sec.  744  (P.  L., 
1910,  p.  64).  If  bank  selected  by  proper  authority  and  officers  di- 
rected to  deposit  funds  therein,  they  would  no  doubt  be  relieved  of 
personal  liability.  See  also  Comp.  St.  Sec.  2289,  (p.  1245),  which  pro- 
vides that  City  Treasurers  shall  deposit  funds  "as  and  when  required 
by  the  City  Council  in  such  banks  and  trust  companies  as  it  may 
designate" 


Board  of  Sinking  Fund  Commissioners  of  any  City  may  be  relieved 
by  depositing  funds  in  such  banks  as  the  City  Council  may  prescribe 
and  the  Mayor  in  writing  approve.  Comp.  St.  Sec.  2293,  p.  1247.  (P. 


L.  1908,  p.  498). 

Borough  Collectors  may  be  relieved  by  depositing  funds  in  banks 
designated  by  the  Council,  the  deposits  to  be  made  in  the  corporate 
name  of  the  borough.  Comp.  St.  Sees.  18-19,  pi  2:>r>. 

County  Clerks  may  be  relieved  by  depositing  funds  In  banks  desig- 
nated by  the  Justice  of  the  Supreme  Court  holding  in  the  circuit. 
Comp.  St.,  p.  1522. 

NEW  YORK. — State  Treasurer  may  be  relieved  by  depositing  funds 
in  such  banks  as  in  the  opinion  of  the  Comptroller  and  Treasurer  are 
secure  and  pay  the  highest  rate  of  interest  to  the  State. — the  banks  to 
give  bond  with  surety  or  bonds  of  the  State  of  New  York  to  be  ap- 
proved by  Comptroller  and  Treasurer.  State  Finance  Law,  Sec.  8. 


70  PUBLIC  OFFICIAL  BONDS. 

the  law  which  exists  has  not  been  strictly  complied 
with,  the  surety  should  require  the  officer  to  demand 


State  officers,  except  Treasurer,  may  be  relieved  by  depository  funds 
in  banks  designated  by  the  Comptroller,  the  banks  to  give  security  to 
be  approved  by  Comptroller.  State  Finance  Law,  Sec.  10. 

Treasurer  of  any  Charitable  or  Benevolent  Institution  may  be  re- 
lieved, as  to  money  received  from  the  State,  by  depositing  it  in  banks 
designated  by  the  Comptroller,  the  banks  to  give  security  to  be  ap- 
proved by  him.  State  Finance  Law,  Sec.  11. 

Treasurers  of  Cities  of  the  second  class  (50,000  to  175,000)  may  be 
relieved  by  depositing  funds  to  the  credit  of  the  city  in  banks  desig- 
nated by  the  Board  of  Estimate  and  Apportionment.  Second  Class 
Cities  law  Sees.  69,  70. 

Town  Supervisors  may,  at  the  expense  of  the  town,  procure  deposi- 
tory bonds  for  the  protection  of  town  funds.  Town  Law,  Sec.  101. 

Treasurers  of  Towns  of  3,000  or  over  in  a  County  of  300,000,  of 
over,  and  adjoining  a  city  of  250,000  or  over,  may  be  relieved  by  de 
positing  funds  in  banks,  if  any,  designated  by  the  Town  Board,  pro- 
vided the  banks  give  such  security  as  the  board  may  require.  Town 
Law,  Sec.  510. 

Village  Treasurers  may  be  relieved  by  depositing  funds  in  banks,  if 
any,  designated  by  the  Board  of  Trustees,  provided  the  banks  give 
such  security  as  may  be  required  by  the  board.  Village  Law,  Sec.  89. 
Sub-Sec.  20. 

OKLAHOMA. — State  Treasurer  directed  to  deposit  funds  in  banks 
designated  by  him,  with  the  consent  of  the  Governor  and  Attorney- 
General, —  the  banks  to  deposit  securities,  (and  not  bond  with  surety), 
to  be  approved  by  the  Governor,  Attorneyi-General  and  Treasurer,  equal 
to  amount  on  deposit,  but  the  amount  on  deposit  at  one  time  shall 
not  exceed  the  capital  of  the  bank.  Comp.  Laws,  1909,  Sees.  7409-10. 
Doubtful  if  Treasurer  relieved. 

\County  Treasurers  may  be  relieved  by  depositing  funds  in  banks  des- 
ignated by  the  County  Commissioners  as  county  depositories, — the 
banks  to  give  bond  in  a  Surety  Company  in  a  sum  equal  to  the  de- 
posits, or  in  lieu  thereof,  may  deposit  securities ;  but  the  deposits  shall 
not  exceed  the  capital  of  the  bank.  Comp.  Laws,  1909,  Sec.  1817. 

Note. — Probably  necessary  to  give  security  notwithstanding  deposi- 
tors guaranty  law  of  1907  and  1909.  See  Sec.  327,  Comp.  St.  1909. 
See  also  Sec.  328.  But  if  security  not  given  public  officers,  like  pri- 
vate individuals,  would  receive  the  benefit  of  this  fund. 

OHIO. — State  Treasurer  may  be  relieved  by  depositing  funds  in 
banks  designated  by  the  State  Board  of  deposit;  provided  he  does  not 
deposit  in  any  bank  an  amount  in  excess  of  its  capital,  nor  in  excess 
of  $300,000,  and  provided  the  banks  deposit  securities  equal  to  the  de- 
posit, or  bonds  with  Corporate  Surety  5  per  cent,  in  excess  of  deposit. 
Page  &  Adams  Code,  Sees.  324  to  330-8. 

County  Treasurers  may  be  relieved  by  depositing  funds  in  banks 
designated  by  County  Commissioners  for  three  years,  provided  the 
banks  give  bonds  or  securities  to  be  approved  by  the  board  equal  to 
the  deposit.  P.  &  A.  Code,  Sees.  2715-41. 

Treasurers  of  Cities  and  Villages  may  be  relieved  by  depositing 
funds  in  banks,  if  any,  designated  by  the  Council,  provided  the  banks 
give  bond  or  furnish  securities  to  be  approved  by  the  proper  municipal 
officers,  in  a  sum  10  per  cent,  in  excess  of  deposit,  and  provided  the 
deposit  does  not  exceed  the  capital  and.  surplus  of  the  bank  nor  ex- 
ceed one  million  dollars.  P.  &  A.  Code,  Sec.  4295. 

Trustees  of  Sinking  Fund  of  Cities  and  Villages  may  be  relieved  by 
depositing  funds  in  banks  selected  by  them,  provided  they  exercise  due 
care  and  require  the  banks  to  give  bond,  with  corporate  surety,  equal 
to  deposit,  or  bond  with  personal  sureties  20  per  cent,  in  excess  of  de- 
posit and  provided  the  deposit  is  not  in  excess  of  the  capital  and  sur- 
plus of  the  bank  or  in  excess  of  $400,000.  P.  &  A.  Code,  Sec.  4515-16. 

Township  Treasurers  may  be  relieved  by  depositing  funds  in  banks 
designated  by  township  trustees,  provided  no  deposit  be  made  in  excess 
of  $300,000  and  provided  banks  give  bond  equal  to  the  deposit.  P.  & 
A.  Code,  Sees.  3320-26. 


PUBLIC  OFFICIAL  BONDS.  71 

of  the  banks,  in  which  he  will  deposit  the  funds  under 
his  control,  a  bond,  with  an  acceptable  corporate  surety 

Treasurer  Board  of  Education  of  School  Districts  may  be  relieved 
by  depositing  funds  in  banks  designated  by  the  school  board,  provided 
the  banks  give  bond  or  securities  to  be  approved  by  the  board  and  pro- 
vided the  deposit  in  any  bank  is  not  in  excess  of  its  capital  nor  in 
excess  of  the  amount  of  the  bond  or  securities.  P.  &  A.  Code,  Sees. 
7604-9. 

OREGON. — State  Treasurer  may  be  relieved  by  depositing  funds  In 
banks  designated  by  him  annually,  provided  the  banks  give  bond  to  the 
State  with  corporative  surety,  or  deposit  with  the  Treasurer  securities 
equal  to  the  deposit.  Lord's  Oregon  Laws,  Sees.  2639-48. 

County  Treasurers  may  be  relieved  in  substantially  the  same  way. 
Acts  1913,  Cb,  273,  p.  515. 

County  Treasurer,  Multonah  County,  may  be  relieved  in  substanti- 
ally the  same  way.  Acts  1913,  Ch.  333,  p.  651. 

PENNSYLVANIA. — Treasurer  of  Counties  of  750,000  to  1,200,000, 
may  be  relieved  by  depositing  funds  in  banks  designated  by  a  board 
composed  of  County  Commissioners,  Comptroller  and  Treasurer,  the 
banks  to  have  a  capital  and  surplus  of  not  less  than  $500,000  and  to 
give  bond  to  be  approved  by  the  County  Commissioners.  5  Purdons 
Dig.  (13th  ed.),  p.  5363.  Act  1  Apr.,  1909,  P.  L.  93. 

Treasurer  of  School  Districts  may  be  relieved  by  depositing  funds 
In  banks  (if  any)  designated  by  the  Board  of  School  Directors  as 
school  depositories.  Purdons  Dig.  (13th  ed.),  Supp.,  1912,  p.  81. 

SOUTH  CAROLINA. — State  Treasurer  directed  to  deposit  funds  in 
such  banks  as  shall  be  agreed  upon  by  Governor,  Comptroller-General, 
and  Treasurer,  or  any  two  of  them.  No  security  required  by  law  and 
not  clear  that  Treasurer  would  be  relieved  in  case  of  bank  failure. 
Civil  Code,  1912,  Sec.  792. 

County  Treasurers  directed  to  deposit  certain  funds  in  banks  se- 
lected by  them  and  to  require  the  banks  to  give  a  "depositors  guar- 
anty bond."  Selection  being  made  by  Treasurer,  he  is  probably  not 
relieved  in  case  of  bank  failure.  Civil  Code,  1912,  Sec.  451. 

SOUTH  DAKOTA. — State  Treasurer  may  be  relieved  by  depositing 
funds  in  banks  designated  by  State  Board  of  Finance,  provided  he  does 
not  deposit  in  any  bank  more  than  40  per  cent,  of  its  capital  and  sur- 
plus and  provided  the  banks  give  bond  :  if  individual  sureties  double 
the  deposit ;  if  corporate  surety,  equal  to  the  deposit.  Laws  1909,  Ch. 
229  ;  Pol.  Code,  1913,  p.  90 :  Laws  1911,  Ch.  234  ;  Pol.  Code,  p.  903. 

County  Treasiirers  may  be  relieved  by  depositing  all  funds  in  banks 
designated  by  County  Commissioners,  provided  the  banks  give  bond  as 
in  the  case  of  state  depositories.  Pol.  Code  1913,  p.  90h  to  92,  Laws 
1913,  Ch.  360. 

TENNESSEE.— State  Treasurer  directed  to  deposit  all  funds  in  such 
bank  or  banks,  as  in  the  opinion  of  the  Comptroller  and  Treasurer 
shall  be  secure,  but  he  shall  not  deposit  in  any  bank  more  than  one- 
fourth  its  capital  Code  of  1896.  Sec.  278-81. 

Any  bank  in  Tennessee  may  become  a  public  depository  of  revenues 
belonging  to  the  State  by  giving  bond  according  to  law  for  the  safe 
keeping  of  the  revenues  deposited  with  it.  Code,  Sec.  970.  Doubtful 
if  compliance  with  these  provisions  would  relieve  Treasurer. 

County  Trustees  may  be  relieved  by  depositing  funds  in  depositories 
designated  by  the  Finance  Committee,  the  depositories  to  execute 
"good  and  sufficient  bond"  to  be  approved  by  the  committee.  Acts 
1909,  Ch.  305,  p>.  1115. 

VIRGINIA. — State  Treasurer  may  be  relieved  by  depositing  funds  in 
banks  named  in  the  statute ;  but  before  any  such  deposit  is  to  be 
made,  banks  must  each  give  bond«  or  furnish  securities  for  $500,000  to 
be  approved  by  the  Governor.  Pollard's  Code  of  1904.  Sec.  753,  as 
amended  and  found  in  Supp.,  1910. 

Treasurers  of  any  County  or  Cfty  may  be  relieved  by  depositing  all 
funds  held  for  school  purposes  in  such  depository  as  the  School  Board 
may  designate,  provided  the  depository  gives  bond  to  be  approved  by 
the  County  or  Corporation  Court.  Pollard's  Code,  1904.  Sec.  1506a. 

\Clerk  and  other  officers  of  State  Corporation  Commission  may  be  re- 
lieved by  depositing  all  funds  in  a  state  depository  designated  by  the 
Commission.  Pollard's  Code,  Sec.  1313a. 


72  PUBLIC  OFFICIAL  BONDS. 

in  favor  of  the  officer  and  his  surety,  conditioned  for 
the  safe  keep-ing  and  proper  payment  of  the  funds  on 
demand.  It  is  not  considered  good  policy  for  a  surety 

Treasurer  Virginia  Normal  and  Industrial  Institute  may  be  relieved 
by  depositing  all  funds  in  banks  designated  by  the  Board  of  Visitors, 
— the  banks  to  give  bond  in  double  the  amount  of  the  deposit.  Pol- 
lard's Code  of  1904,  Sec.  1613cl.  11. 

WASHINGTON. — State  Treasurer  may  be  relieved  by  depositing 
funds  in  state  depositories  designated  by  Board  of  Finance,  provided 
the  amount  on  deposit  at  one  time  does  not  exceed  the  capital  and  sur- 
plus of  the  bank,  nor  the  amount  of  the  bond,  with  corporate  surety 
which  is  required  nor  three-fourths  of  the  value  of  the  securities  de- 
posited in  lieu  of  the  bond.  Rem.  &  Bal.  Code  1910,  Sees.  5065-77 

County  Treasurers  directed  to  designate  depositories  for  county 
funds,  the  depositories  to  give  bond  with  corporate  surety  or  deposit 
securities  equal  to  the  deposit,  but  the  treasurers  are  not  relieved  R. 
&  B.  Code  1910,  Sees.  5072-76. 

City  Treasurers  in  cities  over  75,000  authorized  to  deposit  all  funds 
in  banks  selected  by  them  with  the  approval  of  the  mayor,  the  banks 
to  give  corporate  bond  or  securities  equal  to  the  deposit  to  be  ap- 
proved by  the  Mayor  and  Comptroller  but  it  is  not  clear  that  the 
Treasurer  is  relieved  R.  &  B.  Code  1910,  Sees.  5078-80. 

City  Treasurers  in  cities  less  than  75,000  have  same  authority.  R.  & 
B.  Code  1910,  Sees.  5081-83. 

WEST  VIRGINIA.— State  Treasurer  may  be  relieved  by  depositing 
funds  in  banks  designated  by  Board  of  Public  Works,  the  banks  to 
have  a  capital  of  not  less  than  $20.000  and  to  give  bond  for  not  less 
than  $50,000  (to  be  renewed  every  two  years)  ;  and  the  deposit  to  be 
not  more  than  three-fourths  of  the  penalty  of  the  bond.  Code  1913 
Sees.  750  and  3067. 

Custodian  of  Sinking  Fund  of  any  County,  District,  School  District, 
Independent  School  District.  City,  Town  or  Village  may  be  relieved  by 
Investing  the  sinking  fund  in  the  manner  provided,  or'  if  there  are  no 
securities  available,  by  depositing  the  funds  in  banks  designated  by 
the  County  Court,  Board  of  Education  or  Common  Council,  as  the  case 
may  be,  as  county  or  city  depositories ;  the  banks  to  give  good  and 
sufficient  bond  to  be  approved  by  designating  authority,  in  a  sum 
double  the  amount  to  be  deposited.  Code  1913.  Sees.  2498. 

WISCONSIN. — mate  Treasurer  may  be  relieved  by  depositing  all 
funds  in  State  depositories  designated  for  term  of  four  years  by  State 
Board  of  Deposits,  but  deposit  is  not  to  exceed  bank's  capital ;  the 
banks  to  give  bond  :  if  with  personal  sureties,  double  the  deposit ;  if 
with  corporate  surety,  50  per  cent,  in  excess,  to  be  approved  by  the 
board.  Statutes  1911,  Sees.  160a  to  160d. 

County  Treasurers  may  be  relieved  by  depositing  all  funds  in  de- 
positories designated  by  the  County  Board, — the  banks  to  give  bond 
to  be  approved  by  the  board  for  not  less  than  the  amount  of  the  de- 
posits Statutes  1911  Sees.  693  and  717.  : : 

City  Treasurers  may  be  relieved  by  depositing  all  funds  in  banks  In 
Wisconsin  designated  by  resolution  of  the  Council,  such  banks  to  give 
bond  to  be  approved  by  the  Mayor  and  Comptroller.  St.  1911,  Sees. 
925-127. 

WYOMING. — State  Treasurer  may  be  relieved  by  depositing  funds  in 
depositories  designated  by  the  State  Board  of  Deposits  annually,  pro- 
vided he  does  not  deposit  in  any  bank  more  than  one-half  its  capital 
and  surplus  and  provided  the  banks  give  bond  with  corporate  surety 
or  deposit  securities,  equal  to  deposit.  Comp.  St.  1910,  Sees.  2486-91. 

County  Treasurers,  City  Treasurers,  Town  Trustees  and  Treasurers 
of  School  Districts  may  be  relieved,  if  they  exercise  reasonable  care, 
by  depositing  funds  in  banks  designated  by  the  proper  governing  board, 
provided  the  banks  give  bonds  or  deposit  securities  to  be  ap- 
proved by  the  board ;  but  the  Treasurer  is  not  to  deposit  in  any  bank 
more  than  half  the  penalty  of  the  bond,  if  with  individual  sureties, 
nor  more  than  90  per  cent,  of  securities  or  bond  with  corporate  sure- 
ties nor  more  than  half  the  capital  and  surplus  of  the  bank.  Comp. 
St.  1910,  Sees.  2499-2506. 


PUBLIC  OFFICIAL  BONDS.  73 

company  to  carry  the  depository  liability  on  a  publio 
officer  without  being  compensated  therefor,  or  obtain- 
ing adequate  protection,  in  the  manner  above  indicated ; 
and  in  order  to  avoid  carrying  too  much  liability  in  one 
place,  it  is  advisable  to  let  some  other  company  carry 
the  depository  liability. 

Sec.  36.— Defaults  by  Subordinates.  For  the 
same  reason  that  an  officer,  unless  specially  relieved, 
is  held  liable  for  a  loss  resulting  from  the  failure  of  a 
bank  in  which  he  has  deposited  public  money,1  he  is 
also  held  liable  for  a  loss  resulting  from  a  default  on 
the  part  of  his  deputies  or  clerks.  In  some  cases, 
the  deputies  and  clerks  are  themselves  required  by  law 
to  give  bond  for  the  protection  of  the  state,  county 
or  city,  as  the  case  may  be,  and  that  would  indicate 
that  the  officer  would  not  be  held  liable  for  a  default  on 
their  part.  But,  where  they  are  not  required  by  law 
to  give  bond,  and  where  the  officer  is  liable  for  their 
defaults,  he  should  require  them  to  give  regular  fidel- 
ity bonds,  so  as  to  protect  him  and  his  surety  from  that 
liability.  A  surety  company  cannot  afford,  for  one 
premium,  to  assume  a  risk  of  default  by  more  than  one 
person.2 

Sec.  37.— Loss  by  Burglary,  Theft  or  Larceny.  A 
public  officer  ordinarily  would  not  be  relieved  of  his 
duty  to  account  for  money  that  had  come  into  his 
hands,  by  the  fact  that  it  had  been  taken  from  his  cus- 
tody by  a  tjiird  person.  While  it  is  bad  judgment  for 
an  officer  to  keep  any  substantial  amount  of  public 
money  on  hand,  yet  it  may  sometimes  be  unavoidable. 

iSee  Section  35. 
2  See  Section  1. 


74  PUBLIC  OFFICIAL  BONDS. 

In  that  event,  the  money  should  be  kept  in  a  good  safe ; 
and  he  and  his  surety  should  be  further  protected  by 
burglary  insurance  on  the  safe.  The  premium  for  the 
officer's  bond  does  not  compensate  for  this  risk;  and 
where  the  applicant  declines  to  comply  with  the  surety 'a 
requirement  in  this  respect,  the  bond  should  not  be 
written,  unless  the  financial  resources  of  the  applicant 
are  deemed  sufficient  to  take  care  of  any  probable  loss 
from  this  cause. 

Sec.  38.— Liability  for  Interest  Derived  from  Pub- 
lic Funds.  It  seems  to  have  been  quite  the  custom,  a 
few  years  ago,  for  public  officers  to  appropriate  to 
their  own  use  the  interest  earned  on  public  funds ;  and 
it  appears  to  have  been  considered  proper  in  many 
cases.  But  now  the,  courts  hold  that  a  public  officer 
is  required  to  account  for  any  interest  thati  he  may 
receive  on  loans  or  deposits  of  public  money.  It  ia 
important  therefore  to  ascertain  that  an  applicant  for 
a  public  official  bond  does  not  consider  this  a  legiti- 
mate subject  of  "graft,"  but  that  he  recognizes  his 
obligation  to  account  for  any  money  that  may  be  re- 
ceived from  this  source.  Unless  proper  provision  is 
made  by  which  the  public  will  receive  the  interest,  the 
bond  should  not  be  written  in  the  absence  of  adequate 
financial  responsibility  on  the  part  of  the  applicant. 
The  fact  that  the  use  of  the  interest  by  the  incumbent 
of  the  particular  office  may  have  been  acquiesced  in  by 
the  public  for  a  long  time  is  not  sufficient  to  justify 
its  continuance;  for  there  are  cases  on  record  where 
the  surety  for  a  public  officer  has  been  called  on  to 
make  good  the  interest  on  public  funds  received  and 


PUBLIC  OFFICIAL  BONDS.  75 

used  by  the  officer;  and  this,  notwithstanding  the  fact 
that  the  officer  had  long  since  retired  from  the  office 
and  the  use  of  the  interest  by  him  had  been  apparently 
considered  proper  by  those  who  at  the  time  were  aware 
of  it. 

Sec.  39.— Neglect  or  Malfeasance  of  Official  Duty. 
We  have  been  considering  public  official  bonds  from 
the  standpoint  of  the  liability  of  the  surety  for  public 
money  that  conies  into  the  hands  of  the  officer.  But 
the  surety  is  liable  also  for  the  failure  of  the  officer 
to  perform  his  duties  or  for  the  improper  performance 
i>f  them,  although  of  course  there  can  be  no  recovery 
against  +he  surety  unless  the  neglect  or  malfeasance 
of  the  principal  results  in  financial  loss  either  to  the 
state,  county  or  city,  or  to  some  third  person  who  has 
a  right  to  demand  the  proper  performance  of  duty  by 
the  officer. 

The  best  illustration  of  the  possibilities  of  loss  from 
neglect  or  malfeasance  is  furnished  by  tax  collectors. 
As  a  rule,  a  tax  collector  is  furnished,  at  the  beginning 
of  the  fiscal  year,  with  the  tax  roll  and  is  required, 
within  a  certain  time  either  to  collect  the  taxes  listed 
on  the  roll  or  make  a  satisfactory  explanation  of  his 
failure  to  do  so.  In  some  states,  his  mere  affidavit  to 
the  effect  that  the  taxes  are  uncollectible  will  be  ac- 
cepted, and  on  such  affidavit  he  will  be  relieved  from 
liability.  In  other  states,  his  statement  of  uncollectible 
taxes  is  subject  to  review  by  another  officer,  and  if  the 
other  officer  is  of  the  opinion  that  some  of  the  uncol- 
lected  taxes,  by  the  exercise  of  due  diligence,  might 
have  been  collected,  or  if  he  thinks  the  collector  has 


76  PUBLIC    OFFICIAL    BONDS. 

not  used  all  the  means  provided  for  by  law  for  making 
the  collections,  then  the  collector  will  be  charged  with, 
and  required  to  pay,  the  amount  so  found  to  be  col- 
lectible. It  is  evident  that  a  surety  company  should 
not  take  any  such  risk;  so  that  unless  the  collector 
can  be  relieved  of  liability  for  uncollected  taxes  by 
making  an  affidavit  that  the  uncollected  taxes  are  un- 
collectible, or  by  other  similar  means,  the  bond  is  not 
a  legitimate  surety  proposition  and  should  be  declined, 
unless  perhaps  the  applicant  is  very  strong  financial- 
ly— worth,  say,  an  amount  equal  to  the  penalty  of  the 
bond.  In  determining  how  the  collector  is  to  be  re- 
lieved of  liability  for  uncollected  taxes,  it  is  not  safe 
to  rely  upon  custom  not  supported  by  law,  for  a  change 
in  the  political  complexion  of  tthe  administration  very 
often  brings  about  a  change  in  such  customs. 

Another  illustration  of  the  possibilities  of  loss  from 
neglect  or  malfeasance  is  afforded  by  clerks  of  courts, 
recorders  of  deeds,  and  the  like.  If  such  an  officer, 
or  any  of  his  clerks,  should  inadvertently  fail  to  enter 
a  judgment  or  to  record  a  legal  paper,  or  should  do  so 
erroneously,  and  such  error  should  result  in  loss  to  a 
third  person,  the  officer  and  his  surety  would  be  liable 
for  such  loss.  Such  bonds  should  not  be  written  unless 
the  applicant  is  an  intelligent  man  and  is  familiar  with 
that  character  of  work.  Bonds  of  this  kind  cannot 
safely  be  written  for  men  who,  though  honest,  have  not 
the  experience  and  training  that  will  enable  them  to  do 
the  work  successfully.  In  large  offices,  where  an  ex- 
perienced deputy  is  to  be  in  active  charge  of  the  work, 
this  point  is  not  so  important,  but  the  principal  danger 


PUBLIC    OFFICIAL    BONDS.  77 

lies  in  small  offices,  where  the  officer  himself  is  to  be 
in  active  charge  of  the  work,  and  where,  -by  political 
influence,  an  ignorant  man  or  one  with  little  or  no  cleri- 
cal experience  is  elected  or  appointed  to  fill  the  office. 

"Without  attempting  to  go  into  this  point  in  further 
detail,  it  may  be  said  in  general  that  wherever  an  offi- 
cer is  required  by  law  to  perform  duties,  the  neglect 
or  improper  performance  of  which  will  likely  result 
in  financial  loss  either  to  the  state,  county  or  city,  or 
to  a  third  person  who  has  a  right  to  demand  and  expect 
the  proper  performance  of  duty  by  the  officer,  the  risk 
of  the  surety  is  more  than  an  honesty  risk  and  par- 
takes of  the  nature  of  a  financial  guarantee.  Such 
bonds  should  not  be  written  unless  the  applicant  is 
thoroughly  familiar  with  the  character  of  work  he 
will  be  called  upon  to  do.  If  there  is  any  reasonable 
doubt  on  this  point,  a  fair  amount  of  financial  respon- 
sibility is  requisite, — an  amount  equal  to  one  fourth  the 
penalty  of  the  bond. 

Sec.  40. — Acts  in  Excess  of  Authority.  Another 
way  by  which  a  public  officer  may  impose  a  liability 
on  his  surety  without  misappropriating  any  money  is 
by  exceeding  or  abusing  the  authority  conferred  upon 
him  by  law.  However,  an  official  bond  is  not  regarded 
as  imposing  a  liability  on  the  surety  for  the  purely  per- 
sonal acts  of  the  officer  not  done  as  a  p<art  of,  or  in 
connection  with,  his  official  duty,  as,  for  example,  the 
receipt  of  money  which  it  was  not  the  officer's  duty  to 
receive,  or  the  arrest  of  an  individual,  or  the  seizure 
of  property,  without  a  warrant.  But  in  most  states, 
acts  done  under  color  of  the  office  are  regarded  as  acts 


PUBLIC    OFFICIAL    BONDS. 

for  which  the  sureties  are  liable.  Thus,  the  surety  is 
liable,  where  an  officer,  having  an  execution,  seizes 
the  goods  of  one  person  when  the  execution  is  directed 
to  another;  or  having  a  warrant,  arrests  the  wrong 
person. 

United  States  marshals,  sheriffs  and  constables, 
whose  duties  include  the  service  of  process  of  the 
courts,  are  the  chief  offenders  in  this  respect;  and  be- 
fore executing  bonds  of  this  class,  it  should  be  ascer- 
tained that  the  applicant  has  sufficient  intelligence, 
knowledge  and  discretion  to  keep  within  the  limit, 
or  sufficient  money  or  property  to  take  care  of  his  mis- 
takes. It  is  not  necessary  that  an  officer  take  any  risk, 
as  in  questionable  cases,  he  can  decline  to  execute  the 
process  or  require  a  bond  to  indemnify  him  against 
loss. 

United  States  marshals  are  appointed  by  the  Presi- 
dent and  are  generally  men  of  good  standing  and  are 
able  to  keep  within  their  rights.  In  cases  of  doubt, 
they  can  consult  the  district  attorney;  and  in  many 
offices,  there  is  a  chief  deputy  who  has  been  holding 
from  term  to  term,  who  is  thoroughly  conversant  with 
the  rights  and  duties  of  a  marshal.  As  a  rule,  a  United 
States  Marshal  is  a  good  risk  without  regard  to  his 
financial  responsibility. 

The  same  general  observations  might  be  made  with 
regard  to  sheriffs  in  large  cities  and  counties ;  and  there 
is  little  danger  that  a  sheriff  of  this  class  will  exceed 
his  authority  to  the  extent  of  imposing  a  liability  on 
himself  or  his  surety.  Nearly  all  losses  on  sheriff's 
bonds  occur  in  the  country  districts  where  the  sheriff 


PUBLIC    OFFICIAL    BONDS.  79 

is  likely  to  be  unfamiliar  with  legal  process,  and  the  ex- 
tent of  his  powers;  where  he  personally  does  the  work; 
where  there  is  no  attorney  to  advise  him;  where  the 
only  compensation  is  in  the  shape  of  fees ;  and  where, 
in  order  to  make  a  fee,  he  will  sometimes  "take  a 
chance."  Sheriffs  of  this  class  should  not  be  bonded 
unless  their  experience  and  training  are  such  as  to 
reasonably  qualify  them  for  the  office,  or  unless  they 
have  some  property  subject  to  execution.  If  they  will 
lose  anything  by  acts  in  excess  of  authority,  they  are 
likely  to  keep  within  the  limit. 

The  same  remarks  would  apply  to  deputy  sheriffs 
and  others  who  personally  execute  the  process  in  the 
larger  offices.  However  these  men  are  as  a  rule  under 
the  close  supervision  of  their  chief,  who  can  generally 
keep  them  straight,  and  the  risk  is  not  considered  par- 
ticularly great,  and  financial  responsibility  is  not  ab- 
solutely necessary,  although  of  course  desirable.  It 
often  happens,  however,  that  in  cases  of  strikes  or  other 
disturbances,  a  large  number  of  special  deputies  are 
sworn  in  for  the  purpose  of  maintaining  order.  These 
men  are  paid  by  the  employer,  and,  generally  "go  the 
limit"  in  enforcing  his  orders.  Where  the  feeling 
is  tense  between  the  employer  and  employees,  and 
where  the  strikers  are  a  rough  class  of  men,  such,  for 
example,  as  miners,  the  risk  is  generally  bad,  and  the 
application  should  be  declined. 

Constables,  or  city  marshals,  as  they  are  called  in 
New  York  City,  and  some  other  places,  are  bad  risks 
and  are  rightfully  on  the  prohibited  list  of  surety 
companies.  In  the  first  place,  a  constable  is  generally 


80  PUBLIC    OFFICIAL    BONDS. 

a  low  order  of  politician  with  little  or  no  money  and 
less  brains,  and  who,  having  been  unable  to  get  any 
other  position,  accepts  that  of  constable  as  a  last  re- 
sort. In  the  second  place,  constables  are  given  the 
undesirable  collections  of  loan  sharks,  instalment 
houses  and  the  like,  and  being  hard  up  for  fees  and 
having  nothing  to  lose,  will  generally  make  seizures 
regardless  of  consequences,  as  long  as  they  get  the 
fee.  The  surety  on  such  a  bond  is  in  constant  danger 
of  damage  suits. 


CHAPTER  III. 
Court  Bonds—Fiduciaries. 

Sec.  41.— In  the  language  of  surety  companies,  a 
fiduciary  is  one  who,  under  the  jurisdiction  and  super- 
vision of  a  court  of  justice,  has  the  care  and  custody 
of  another's  property,  holding  it  in  trust.  The  term 
includes  executors  and  administrators  of  estates  of 
deceased  persons,  trustees,  receivers,  assignees  for  the 
benefit  of  creditors,  guardians  and  tutors  of  minors, 
and  committees  and  conservators  of  the  estates  of  in- 
competents. Fiduciaries  are  always  required  to  give 
bond  with  surety  for  the  faithful  performance  of  their 
duties;  and  these  bonds  form  one  of  the  most  import- 
ant branches  of  the  surety  business. 

It  seems  advisable,  before  beginning  a  discussion 
of  the  underwriting  of  these  bonds,  to  define,  briefly 
and  in  a  general  way,  the  duties  of  each  of  the  differ- 
ent classes  of  fiduciaries,  so  that  the  discussion  may  be 
the  more  intelligible. 

Sec.  42.— Executors  and  Administrators.  An  ex- 
ecutor is  a  person  appointed  by  a  will  to  administer  tho 
estate  of  a  testator,— to  pay  his  debts  and  distribute 
the  assets  as  directed  by  the  will.  An  administrator 
is  a  person  appointed  by  a  court  having  jurisdiction 
over  estates  of  deceased  persons  to  perform  the  same 
functions  with  respect  to  the  estate  of  a  person  who 
has  died  without  leaving  a  will;  the  distribution,  in 
that  event,  being  made  as  directed  by  law. 

It  is  the  duty  of  an  executor  or  administrator  im- 
mediately to  take  charge  of  the  assets  and  give  notice 


82  COURT  BONDS — FIDUCIARIES. 

by  publication,  in  t«he  manner  required  by  law,  of  his 
appointment,  so  that  those  who  have  claims  against 
the  estate  may  have  an  opportunity  to  present  them 
to  the  court  to  be  approved  and  allowed.  As  soon  as 
practicable,  he  ought  to  file  with  the  court  an  inven- 
tory of  the  assets;  and,  when  the  statutory  period 
within  which  claims  may  be  filed,  has  expired,  he  ought, 
unless  the  estate  is  involved  in  litigation,  or  he  is 
otherwise  delayed,  to  pay  the  debts  and  distribute  the 
balance  of  the  estate  to  those  entitled  to  receive  it. 
The  identical  assets  may  be  distributed  where  practi- 
cable ;  but,  if  necessary,  the  executor  may,  under  proper 
order  of  the  court,  sell  them  and  distribute  the  pro- 
ceeds.1 

Although  it  is  the  duty  of  an  executor  or  admin- 
istrator, as  soon  as  practicable,  to  distribute  the  estate, 
and  not  to  hold  and  invest  it;  yet,  if  there  should  be 
a  necessary  delay  in  winding  up  the  estate,  he  ought  to 
use  reasonable  diligence  to  have  the  estate  yield  an 
income.2 

An  executor  is  not  expected  to  continue  a  business 
left  by  the  decedent,  unless  specially  authorized  to  do 
so  by  the  will;  and  if  he  does  so,  and  loses  any  part 
of  the  assets,  he  and  his  surety  will  be  liable.  Like- 
wise, an  administrator  ought  not  to  continue  a  business 
unless  authorized  to  do  so  by  the  court;  and  then  only 
when  the  court  has  specific  statutory  authority  to 
make  the  order.3 


iSee  Section  69. 
2See  Section  64. 

sSee  Section  62,  and  for  a  more  complete  discussion  of  the  duties 
and  liabilities  of  executors  and  administrators  see  Sections  54-74. 


COURT  BONDS — FIDUCIARIES.  83 

Sec.  43. — Administrators  De  Bonis  Non.  Where 
an  administrator  dies,  resigns,  or  is  discharged  before 
the  administration  is  complete,  it  is  the  duty  of  the 
probate  court  to  appoint  a  successor,  who  is  called  an 
administrator  de  bonis  non.  It  is  his  duty  to  complete 
the  administration  in  the  same  way  as  the  first  admin- 
istrator would  have  been  required  to  do.1 

Sec.  44. — Administrators  Cum  Testamento  An- 
nexo.  Where  a  man  leaves  a  will  but  does  not  name 
an  executor,  it  is  the  duty  of  the  court  to  appoint  some 
one  to  administer  the  estate.  Such  a  one  is  called  an 
administrator  with  the  will  annexed  (cum  testamento 
annexo,  or  c.  t.  a.).  His  duties  are  the  same  as  if  he 
had  been  named  in  the  will.2 

Sec.  45.— Administrators  Cum  Testamento  Annexe 
De  Bonis  Non.  Where  an  executor  dies,  resigns  or  is 
discharged  before  the  administration  is  complete,  it  is 
the  duty  of  the  probate  court  to  appoint  a  successor, 
known  as  the  administrator  with  the  will  annexed  de 
bonis  non,  (cum  testamento  annexo  de  bonis  non  or 
c.  t.  a.  d.  b.  n.).  It  is  the  duty  of  such  an  administrator 
to  complete  the  administration  in  the  same  way  as  the 
executor  would  have  been  required  to  do,— paying  the 
debt  and  carrying  out  the  provisions  of  the  will.3 

Sec.  46.— Temporary  or  Special  Administrators  or 
Administrators  Pendente  Lite.  When  a  will  is  offered 
for  probate,  and  its  validity  is  contested,  the  person 
named  in  the  will  as  executor  will  not  be  permitted  to 


iSee  Section  42  and  Sections  54-74. 
2 See  Section  42  and  Sections  54-74. 
5See  Section  42  and  Sections  54-74. 


84  COURT  BONDS — FIDUCIARIES. 

qualify  as  such  until  it  has  been  decided  that  the  will 
is  valid.  In  the  meantime,  the  court  will  appoint  some 
one  to  preserve  the  estate.  And  where,  in  a  case  of 
intestacy,  there  is  a  contest  as  to  who  is  entitled  to  be 
appointed  administrator,  or  where  there  is  any  other 
reason  why  a  regular  or  permanent  administrator  can- 
not be  appointed,  the  court  will  likewise  appoint  some 
one  to  look  after  and  preserve  the  estate.  Such  an 
appointee  is  known  as  a  temporary  or  special  adminis- 
trator or  an  administrator  Pendente  Lite  depending 
upon  the  language  of  the  statute  regulating  the  matter 
or  the  usage  in  the  particular  State.  The  duty  of  such 
an  administrator  is  merely  to  preserve  the  estate.  The 
Court  may  authorize  him  to  convert  into  money  any 
part  of  the  estate  which  may  be  perishable  or  which 
is  likely  to  depreciate  in  value.  But  generally  he  has  no 
right  to  pay  any  debts  or  to  distribute  any  of  the  as- 
sets or  to  carry  on  any  business  that  may  have  been 
left  by  the  decedent.  His  duties  are  simply  to  pre- 
serve the  estate  pending  final  decision  as  to  the  valid- 
ity of  the  will  or  as  to  who  is  entitled  to  be  adminis- 
trator.1 

Sec.  47. — Trustees.  Any  person  who  holds  prop- 
erty in  trust  for  another  is  a  trustee.  In  that  sense, 
trustee  has  the  same  meaning  that  we  have  given  to 
the  word  fiduciary.  In  the  language  of  surety  com- 
panies, trustee  is  used  in  a  more  restricted  sense,  in- 
cluding only  trustees  strictly  so  called.  Indeed,  it  is 
generally  limited  to  trustees  of  express  trusts,  that  is 


iSee  Section  42  and  Sections  54-74. 


COURT  BONDS — FIDUCIARIES.  85 

to  say,  trusts  created  by  an  instrument  -  in  writing, 
such  as  a  deed,  or  will;  and  furthermore,  it  is  limited 
to  such  trustees  of  express  trusts  as  administer  their 
trusts  under  the  jurisdiction  of  a  court  of  chancery. 

The  first  and  most  important  duty  of  such  a  trus- 
tee is  to  study  and  become  thoroughly  familiar  with 
the  provisions  of  the  instrument),  and  thereafter  to 
follow  them  out  explicitly.  In  cases  where  there  are 
no  directions  in  the  instrument,  or  where  the  directions 
are  ambiguous,  uncertain,  or  incomplete,  he  ought  to 
apply  to  the  court  for  directions.  In  this  connection, 
it  is  to  be  remembered  that  a  court  of  chancery  is  a 
court  of  general  jurisdiction;  and  that  a  grant  of  au- 
thority from  such  a  court,  unless  appealed  from  and 
reversed,  will  generally  protect  the  trustee  and  his 
surety  from  liability  for  any  loss  that  may  result.1 

Sec.  48. — Trustees,  Commissioners,  Guardians  and 
Administrators  to  Sell  Property.  "When  a  court  of  chan- 
cery orders  the  sale  of  real  estate  or  personal  property,  it 
is  usual,  and  indeed  necessary,  to  appoint  a  trustee,  or 
commissioner  to  make  the  sale.  It  is  the  duty  of  such 
appointee  to  sell  the  property  either  at  public  or  pri- 
vate sale,  as  may  have  been  ordered,  and  upon  the  terms 
fixed  by  the  decree.  He  is  then  to  apply  the  proceeds 
in  accordance  with  the  orders  of  the  court, — either  in- 
vesting them  or  distributing  them  to  the  proper  per- 
sons. The  same  duties  are  incumbent  upon  an  admin- 
istrator, a  guardian  or  other  fiduciary,  who  may  be 
authorized  by  a  court  to  make  sale  of  real  estate  or  per- 


iSee  Sections  54-74. 


86  COURT  BONDS — FIDUCIARIES. 

sonal  property.  In  all  such  cases  it  is  important  that  the 
sale  be  made  to  a  third  person,  in  good  faith,  for  the 
best  price  that  can  be  obtained  and  in  the  manner  and 
upon  the  terms  fixed  by  the  order.  The  proper  dis- 
position of  the  proceeds  will  depend  upon  the  order  of 
the  court,  and  it  should  be  strictly  followed.1 

Sec.  49. — Receivers.  A  receiver  is  an  officer  of  a 
court  of  chancery,  through  whom  the  court,  in  the 
exercise  of  its  jurisdiction,  takes  possession  of  property 
which  is  the  subject  of  a  suit,  preserves  it  from  spolia- 
tion, waste  or  destruction,  and  ultimately  disposes  of 
it  according  to  the  rights  of  those  entitled  thereto. 
The  most  frequent  occasion  for  the  appointment  of  a 
receiver  is  for  a  business  which  is  insolvent  and  where 
the  assets  are  in  danger  of  spoliation  or  waste. 

The  purpose  of  the  appointment,  however,  is  not 
necessarily  at  once  to  wind  up  the  business  and  dis- 
tribute the  assets  to  the  creditors,  but  the  receiver  may 
be  authorized  by  the  court  to  continue  the  business. 
Being  a  court  of  general  jurisdiction,  its  order  to 
continue  the  business  will  be  a  complete  protection  to 
the  receiver,  even  though  a  loss  should  be  the  result; 
provided,  of  course,  the  receiver  exercises  reasonable 
care  and  diligence  to  make  the  business  successful, 
complies  with  all  the  orders  of  the  court  and  makes 
the  required  reports  to  the  court  from  time  to  time 
while  the  business  is  being  conducted.  The  receiver- 
ship will  be  terminated  finally  by  paying  all  the  debts 
and  restoring  the  property  to  the  original  owners,  or 
selling  it  and  distributing  the  proceeds  to  the  creditors.1 


iSee  Sections  54-74. 


COURT  BONDS — FIDUCIARIES.  87 

Sec.  50. — Receivers  and  Trustees  in  Bankruptcy. 
When,  under  the  national  bankruptcy  law,  a  man  is 
adjudicated  a  bankrupt  by  the  United  States  District 
Court  (and  sometimes  before  he  is  so  adjudicated),  it 
is  the  duty  of  the  court  to  appoint  a  receiver  to  take 
charge  of  the  assets  of  the  bankrupt.  The  duty  of  the 
receiver  is  merely  to  hold  the  assets  intact  pending  the 
election  by  the  creditors  of  a  trustee;  although  the  re- 
ceiver may  be  authorized  to  convert  into  money  any 
assets  that  may  be  of  a  perishable  nature.  The  duty 
of  the  trustee  is  to  convert  the  estate  into  money  and 
distribute  it  to  the  creditors,  being  governed  in  all 
matters  by  the  terms  of  the  bankruptcy  law  and  the 
order  of  the  court.1 

Sec.  51.— Assignees  for  the  Benefit  of  Creditors. 
A  person  who  is  unable  to  pay  his  debts  may  file  his 
petition  in  bankruptcy,  give  up  all,  or  practically  all, 
of  his  property,  and,  in  a  proper  case,  get  a  discharge 
from  all  his  debts.  This  is  the  usual  practice,  but 
there  are  cases  where  the  insolvent  debtor  prefers  to 
make  an  assignment  for  the  benefit  of  creditors;  that 
is,  convey  all  his  property  to  a  third  person,  with  di- 
rections to  convert  it  into  money,  and  after  paying 
expenses,  to  divide  it  among  the  creditors.  The  grantee 
in  such  a  conveyance  is  known  as  an  assignee  for  the 
benefit  of  creditors.  It  is  his  duty  to  administer  the 
trust  in  the  manner  pointed  out  in  the  deed  of  assign- 
ment; and  in  order  that  he  and  his  surety  may  be 
protected,  as  far  as  possible,  from  the  consequence  of 


iSee  Sections  54-74. 


88  COURT  BONDS — FIDUCIARIES. 

his  errors,  lie  ought  to  submit  himself  and  the  estate 
to  the  jurisdiction  of  a  Court  of  Chancery  and  obtain 
its  directions  in  all  matters  pertaining  to  the  adminis- 
tration of  the  trust.  If  he  does  not  do  so,  he  and  his 
surety  not  only  take  the  risk  of  errors,  but  the  assignee 
will  not  be  required  to  file  periodical  accounts  nor  can 
the  surety  obtain  a  statutory  release  nor  will  the  surety 
have  any  of  the  other  rights  and  remedies  in  such 
cases  provided.  Consequently  the  risk  of  the  surety 
is  greatly  increased  by  an  administration  independent 
of  a  Court  of  Chancery. 

There  is  still  another  danger  to  which  an  assignee 
and  his  surety  are  subject.  The  making  of  an  assign- 
ment for  the  benefit  of  creditors  is  in  itself  an  act  of 
bankruptcy;  that  is  to  say,  it  gives  the  creditors  the 
right  to  have  the  assignor  adjudicated  a  bankrupt  and 
to  have  the  estate  administered  by  the  United  States 
District  Court,  which  is  the  bankruptcy  court.  If  after 
an  assigned  estate  has  been  partially  administered,  the 
assignor  should  be  thrown  into  bankruptcy,  the  trustee 
in  bankruptcy  would  be  entitled  to  the  entire  estate, 
just  as  it  existed  at  the  time  of  the  assignment,  and 
would  of  course  be  bound  to  distribute  it  in  accordance 
with  the  bankruptcy  law.  If  therefore,  the  assignee 
had  disposed  of  the  estate,  or  any  part  of  it,  contrary 
to  the  provisions  of  the  bankruptcy  law,  even  though 
in  accordance  with  the  state  law  governing  assigned 
estates,  he  and  his  surety  would  be  bound  to  make  good 
the  portion  thus  improperly  distributed. 

This  is  not  merely  a  theoretical  danger,  for  one  of 
the  companies  sustained  a  single  loss  of  over  $17,000.00 


COURT  BONDS — FIDUCIARIES.  89 

from  this  cause.  In  this  connection,  it  may  be  well  to 
note  that  assignments  of  this  kind  are  made,  as  a  rule, 
only  where  the  assignee  wants  to  give  some  special 
preference  that  would  be  contrary  to  the  bankruptcy 
law,  or  obtain  for  himself  some  advantage  that  would 
not  be  permissible  under  that  law.  Any  such  prefer- 
ence or  advantage  would  necessarily  be  to  the  disadvan- 
tage of  the  general  creditors  and  therefore  it  is  quite 
probable  that  the  assignor  will  be  put  into  bankruptcy ; 
and  a  surety  should  not,  as  a  rule,  sign  these  bonds 
unless  the  applicant  has  a  very  considerable  amount  of 
property.1 

Sec.  52. — Guardians  and  Tutors  of  Minors.  A 
guardian  is  the  person  appointed  by  a  probate  court 
to  manage  the  estate  of  a  minor,  the  latter  being  known 
as  the  ward.  In  Louisiana,  the  person  who  manages 
the  estate  of  a  minor  is  called  a  tutor.  It  is  the  duty 
of  the  guardian  or  tutor  to  take  charge  of  the  estate 
and  keep  it  invested,  in  the  manner  provided  by  law 
and  the  orders  of  the  court,  until  the  minor  reaches 
his  majority.  It  then  becomes  his  duty  to  file  a  final 
account,  turn  over  the  estate  to  the  ward,  and  obtain 
a  release  of  himself  and  his  surety.  He  should  also, 
during  the  minority  of  the  ward,  file  periodical  ac- 
counts of  his  administration,  as  required  by  law.  If  it 
is  necessary  for  the  guardian  to  expend  any  part  of 
the  estate,  either  principal  or  income,  for  the  mainte- 
nance or  education  of  the  ward,  or  for  any  other  pur- 
pose, he  should  obtain  an  order  of  court  authorizing 


iSee  Sections  54-74. 


90  COURT  BONDS — FIDUCIARIES. 

him  to  do  so;  otherwise  he  and  his  surety  may  be  held 
liable  for  the  money  so  expended.  In  some  states  the 
guardian  has  a  discretion  to  use  the  income  for  the 
maintenance  of  the  ward,  but  it  is  not  the  general  rule ; 
and  unless  the  statutes  expressly  authorize  the  guardian 
to  do  so,  the  surety  should  not  permit  it.1 

Sec.  53. — Committee,  Conservator  or  Curator.  An 
insane  person,  or  person  non  compos  mentis,  has  no 
status  in  law,  and  like  a  minor,  cannot  legally  act  with 
respect  to  his  own  property.  It  is  therefore  necessary 
for  the  courts  to  appoint  some  one  to  act  for  him. 
Such  person  is  called  a  committee,  in  most  of  the  states ; 
although  in  Illinois,  and  some  others,  he  is  called  con- 
servator, and  in  Louisiana,  he  is  called  a  curator.  His 
duty  is  to  manage  the  estate,  under  the  order  of  the 
court,  and  keep  it  properly  invested.  He  should  file 
periodical  accounts  of  his  administration;  and,  if  it 
becomes  necessary  to  use  any  part  of  the  estate  for  the 
maintenance  of  the  incompetent,  he  should  obtain  an 
order  of  court  authorizing  him  to  do  so.1 

Sec.  54.— The  Underwriting  of  Bonds  of  Fiduciar- 
ies. In  the  preceding  pages,  all  of  the  important  kinds 
of  fiduciaries  have  been  mentioned,  and  a  brief  sketch 
has  been  made  of  some  of  the  duties  and  liabilities  pecu- 
liar to  each  class.  Consideration  will  now  be  given  to 
the  duties  and  liabilities  which  are  common  to  nearly  all 
fiduciaries  and  to  the  nature  of  the  risk  that  will  be 
assumed  by  the  surety ;  and  in  the  case  of  fidelity  bonds, 
and  bonds  of  public  officers,  the  subject  will  be  treated 


iSee  Sections  54-74. 


COURT  BONDS — FIDUCIARIES.  91 

from  the  two  standpoints  of  the  personality  of  the  appli- 
cant, and  the  nature  of  the  position. 

Sec.  55.— The  Personality  of  the  Applicant.    In 

the  consideration  of  applications  for  bonds  of  fiduci- 
aries, surety  companies  are  confronted  with  the  person- 
al element  in  much  the  same  way  as  with  fidelity  and 
public  official  applications.  The  duty  of  a  fiduciary 
includes  the  custody  and  care  of  money  and  property 
of  others,  and  it  is  necessary  to  be  satisfied  as  to  his 
probable  honesty. 

It  is  not  feasible,  however,  as  a  rule,  to  investigate 
his  antecedents,  environment,  character,  habits  and 
record  of  service  to  the  same  extent  as  with  fidelity 
applications.1  Generally  the  only  sources  of  informa- 
tion are  the  applicant's  attorney  and  the  three  or  four 
persons  to  whom  the  applicant  refers.  In  making  an 
investigation  through  these  sources,  the  underwriter 
will  be  governed  by  the  same  rules  and  principles  as 
in  the  case  of  fidelity  and  public  official  applications.2 
However,  in  many  cases  an  almost  immediate  decision 
is  necessary,  so  that  practically  no  opportunity  to  make 
an  investigation  is  offered.  Applicants  will  then  have 
to  be  accepted  or  rejected  on  their  general  reputation 
and  the  statements  of  their  attorneys ;  but  this  can  safely 
be  done  only  where  the  surety  obtains  joint  control  of 
the  assets  so  that  they  cannot  be  misappropriated  with- 
out the  consent  of  the  surety.  Indeed,  as  we  shall  see 
it  is  getting  to  be  the  uniform  practice  of  bonding  com- 


iSee  Sections  5-7. 
2See  Section  8. 


92  COURT  BONDS — FIDUCIARIES. 

panics  to  require  all  applicants  for  bonds  of  this  kind, 
to  give  the  surety  joint  control  of  the  assets.1 

Sec.  56.— Personality — As  Affected  by  Standing  of 
His  Attorney.  There  are  few,  if  any,  cases  in  which 
fiduciaries  can  successfully  perform  their  duties  with- 
out the  continuous  aid  and  advice  of  an  attorney;  and 
they  have  a  right,  at  the  expense  of  the  estate,  to  em- 
ploy counsel  to  represent  them.  The  character  of  an 
applicant  can  often  be  determined  by  the  standing  of 
his  attorney;  and  furthermore,  the  character  and 
standing  of  the  attorney,  and  the  extent  of  his  control 
over  the  practical  management  of  the  estate  are  im- 
portant considerations  in  judging  the  desirability  of  a 
particular  risk.  Where  a  careful  attorney  of  well 
recognized  ability  and  integrity  has  the  actual  manage- 
ment of  the  estate,  the  possibility  of  loss  is  greatly 
reduced.  And  where  the  applicant  is  not  represented 
by  an  attorney  of  good  standing,  the  business  should  be 
declined  unless  strict  joint  control  is  secured;  and  even 
then,  it  is  not  altogether  desirable,  as  it  is  always  un- 
satisfactory to  deal  with  an  attorney  in  whom  one  has 
not  reasonable  confidence. 

Sec.  57. — The  Nature  of  the  Position.  In  General. 
The  bond  of  a  fiduciary  is  not,  like  a  fidelity  bond,2 
limited  to  cover  only  certain  definite  and  specific  acts 
of  the  principal;  but,  like  the  bond  of  a  public  officer,3 
is  conditioned  for  the  faithful  performance  of  all  his 
duties.  The  duties  of  the  several  kinds  of  fiduciaries 


iSee  Sections  58  and  72. 
2See  Section     2. 
3See  Section  21. 


COURT  BONDS — FIDUCIARIES.  93 

have  in  a  general  way  been  indicated,  and  some  of  the 
liabilities  peculiar  to  each  class  have  been' pointed  out.1 
It  is  next  in  order  to  consider  the  duties  and  the  liabili- 
ties, which  are  common  to  nearly  all  fiduciaries,  and  to 
which  they  and  their  sureties  are  subject.  In  the  mean- 
time, however,  let  us  consider  their  opportunities  for 
misappropriating  the  assets  and  the  means  of  limiting 
this  opportunity. 

Sec.  58. — Opportunity  for  Misappropriation.— 
Joint  Control.  A  fiduciary,  under  the  law,  has  sole  con- 
trol of  the  assets  of  the  estate,  so  that,  in  the  absence  of 
interference  by  the  surety,  his  opportunity  is  limited 
only  by  the  amount  of  the  estate.  However,  it  is  now 
the  very  general  practice  of  surety  companies  to  re- 
quire all  applicants  for  bonds  of  this  kind  to  give  the 
representative  of  the  surety  company  joint  control  of 
the  estate.  Joint  control,  as  the  term  here  used,  con- 
templates that  the  funds  are  to  be  put  in  a  bank  and  the 
securities  in  a  safety  deposit  box,  in  the  name  of  the 
estate  subject  to  the  joint  order  of  the  principal  and  the 
company's  representative,  so  that  they  cannot  be  with- 
drawn except  upon  the  counter-signature  of  the  latter. 
And  it  is  important,  not  merely  to  have  the  applicant 
agree  to  give  joint  control,  but  to  obtain  from  him  a 
letter  addressed  to  the  bank,  or  other  custodian  of  the 
funds  and  property  of  the  estate,  consenting  that  such 
custodian  may  deliver  the  property  only  upon  the 
counter-signature  of  the  surety's  representative. 

In  the  keen  competition  for  business,  surety  agents 


iSee  Sections  42   and   53. 


94  COURT  BONDS — FIDUCIARIES. 

often  waive  joint  control  in  order  to  get  a  particular 
bond  or  the  business  of  a  particular  man,  but  it  is  a 
bad  practice.  In  the  great  majority  of  cases,  most  men 
being  honest,  joint  control  could  of  course  be  waived 
with  perfect  safety;  but  inasmuch  as  it  is  impossible 
accurately  to  pick  out  these  cases  in  advance,  and  in- 
asmuch as  losses  occur  where  they  are  least  expected, 
it  is  suggested  that  joint  control  be  made  the  universal 
rule.  I  have  in  mind  a  case  in  my  own  experience 
where  a  man  of  the  very  highest  standing  in  the  com- 
munity and  of  reputed  wealth — one  whom  anybody 
would  have  trusted— applied  for  an  administrator's 
iDond  and  suggested  that  joint  control  be  waived. 
Considering  the  business  gilt-edged,  and  desiring  to 
retain  the  applicant's  good  will,  having  future  busi- 
ness in  view,  I  readily  consented,  to  find  about  a  year 
later  that  he  was  a  defaulter  for  a  very  large  sum  and 
that  of  the  five  thousand  dollars  received  by  him  as 
administrator,  he  had  on  hand  only  about  twenty-five 
dollars,  the  balance  having  been  misappropriated.  The 
records  of  the  companies  are  full  of  such  cases,  and 
there  ought  to  be  none.  A  surety  company  is  not  paid 
for  taking  any  risk,  but  merely  for  the  use  of  its  name 
and  credit,  and  when  the  bulk  of  the  risk  can  be  avoid- 
ed so  easily,  it  should  be  done.  Joint  control  should 
be  the  universal  rule. 

However,  in  the  case  of  receivers  and  trustees  in 
bankruptcy,  the  referee,  who  is  an  officer  of  the  court, 
is  expected  to  and  generally  does  exercise  joint  con- 
trol of  the  money  and  securities  of  the  estate,  requiring 
them  to  be  deposited  in  a  bank  selected  and  designated 


COURT  BONDS — FIDUCIARIES.  95 

by  the  Court.  In  that  event,  it  is  of  course  unneces- 
sary for  the  surety  company  to  exercise  joint  control; 
but  in  some  jurisdictions  the  referee  is  lax  in  this  re- 
spect, particularly  in  cases  where  the  trustee  is  to  con- 
duct the  business  of  the  bankrupt,  which  would  require 
the  frequent  issuance  of  checks.  If  in  any  particular 
case,  the  referee  will  nott  effectively  exercise  joint 
control,  then  the  surety  should  insist  upon  it. 

Sec.  59. — Duties  and  Liabilities.  In  General.  A 
fiduciary,  as  we  have  seen,  is  bound  faithfully  to  per- 
form his  duties;  and  this  necessarily  subjects  him  and 
his  surety  to  certain  liabilities,  against  which  they  must, 
at  their  peril,  protect  themselves.  As  a  rule,  surety 
companies  do  not  leave  the  fiduciaries  whom  they  have 
bonded  to  act  entirely  upon  their  own  judgment,  but 
endeavor,  so  far  as  may  be  reasonably  possible,  to  see  to 
it  that  they  properly  perform  their  duties,  and  in  many 
cases,  exercise  joint  control  of  the  estate,  to  the  end 
that  there  may  be  no  loss  under  the  bond.  In  the  en- 
suing pages  therefore,  the  principal  duties  and  liabili- 
ties of  fiduciaries  will  be  indicated,  and  some  sugges- 
tions will  be  made  as  to  the  proper  method  of  perform- 
ing those  duties  and  thereby  avoiding  the  liabilities.1 

Sec.  60. — Possession  of  the  Trust  Property.  The 
first  duty  of  a  fiduciary  is  to  secure  possession  of  the 
trust  property.  If  it  consists  in  part,  of  notes,  bonds, 
policies  of  insurance  and  the  like,  he  should  notify  the 


Hn  attempting  to  define  the  more  important  duties  and  liabilities 
of  fiduciaries,  I  have  consulted  and  relied  upon  many  authorities  and 
text  writers  ;  and  I  wish  particularly  to  acknowledge  my  indebtedness 
to  Mr.  Augustus  P.  Loring,  whose  "A  Hand  Book  for  Trustees"  is  a 
recognized  authority. 


96  COURT  BONDS — FIDUCIARIES. 

promisors  or  makers  of  the  instruments,  and  should  ob- 
tain actual  possession.  And  the  transfer  to  him  should 
be  made  in  such  a  way  as  to  identify  the  instruments  as 
a  part  of  the  particular  trust  estate.  Likewise  the 
fiduciary  should  proceed  at  once  to  collect  the  debts 
due  the  estate.  There  is  no  fixed  time  within  which 
the  debts  must  be  collected,  but  he  must  use  due  dili- 
gence under  the  circumstances. 

If  the  trust  estate  consists  in  part  of  real  estate, 
he  should  see  that  the  record  title  is  put  in  his  name  in 
his  fiduciary  capacity,  or  in  the  name  of  the  beneficiary, 
as  the  circumstances  of  the  case  may  require;  and  he 
should  take  possession  of  it,  either  actual  or  construct- 
ive. If  it  is  under  lease,  he  should  take  constructive 
possession  of  it  by  compelling  the  tenant  to  acknowl- 
edge him  as  the  landlord  and  to  agree  to  p-ay  rent  to 
him;  if  there  is  no  tenant,  he  should  take  actual  pos- 
session. If  the  beneficiary  is  in  possession,  under  the 
terms  of  the  trust,  he  need  do  nothing,  as  under  these 
circumstances,  the  possession  of  the  beneficiary  is  the 
possession  of  the  trustee. 

gec>  61. — Filing  of  Inventory.  As  soon  as  the  es- 
tate has  come  into  the  possession  of  the  fiduciary,  he 
should  make  an  inventory,  and  file  it  with  the  clerk 
of  the  court  having  jurisdiction.  Inasmuch  as  the  in- 
ventory shows  the  assets  for  which  the  surety  is  liable 
and  shows  the  form  in  which  they  exist,  it  will  aid  the 
surety  in  deciding  what  steps  the  fiduciary  ought  to 
take,  and  in  guiding  him  in  the  performance  of  his 
duties.  As  soon  as  possible  therefore,  the  surety  should 


COURT  BONDS — FIDUCIARIES,  97 

obtain  a  copy  of  the  inventory.  A  simple  request  to 
the  attorney  will  generally  bring  it. 

Sec.  62. — Conversion  of  Estate  into  Proper  Form. 
Speaking  generally,  fiduciaries  are  appointed  either  to 
distribute  the  estate  to  those  entitled  to  it,  or  to  hold 
and  invest  it  so  that  it  will  produce  the  largest  income 
that  is  consistent  with  absolute  safety  of  principal. 

Where  it  is  the  duty  of  the  fiduciary  merely  to 
divide  the  estate,  as  is  the  case  with  executors,  adminis- 
trators, receivers,  assignees  and  the  like,  it  is  generally 
necessary,  to  convert  the  estate  into  money,  so  that  it 
may  be  properly  divided;  although,  in  the  case  of  es- 
tates of  deceased  persons,  distribution  can  sometimes 
be  made  of  the  specific  property.  In  any  event,  the 
purpose  of  such  an  appointment  is  to  ascertain  what 
persons  are  entitled  to  the  property,  and,  with  all  reas- 
onable despatch,  to  distribute  it  to  them;  and  not  to 
carry  on  any  mercantile  business  belonging  to  the  es- 
tate, or  otherwise  attempt  to  make  money  for  the  es- 
tate. 

In  the  case  of  estates  of  deceased  persons,  it  is  the 
universal  rule,  that,  in  the  absence  of  express  direc- 
tion, either  in  the  will  or  by  a  proper  order  of  court, 
the  executor  or  administrator  should  not  attempt  to 
carry  on  the  business  of  the  decedent,  but  should  imme- 
diately close  it  up  and  convert  it  into  money.  And  it 
is  to  be  borne  in  mind  that  the  courts  having  jurisdic- 
tion over  the  estates  of  decedents,  being;  courts  of  lim- 
ited jurisdiction,  and  having  only  the  powers  given  by 
statute,  generally  have  no  power  to  authorize  an  execu- 
tor or  administrator  to  conduct  the  business.  In  the 


98  COURT  BONDS — FIDUCIARIES. 

absence  of  express  statutory  authority,  such  an  order 
would  be  void,  and  would  not  relieve  the  executor  or 
administrator  and  his  surety  from  liability  for  any  loss 
that  might  result.  When  the  estate  of  a  decedent  con- 
sists of  a  running  business,  the  surety  should  not  sign 
the  bond  of  the  administrator  unless  it  is  clearly  under- 
stood that  the  business  will  immediately  be  closed  and 
the  stock  sold. 

In  the  case  of  receivers,  assignees  and  the  like,  who 
are  under  the  jurisdiction  of  courts  of  chancery,  the 
court  may,  and  often  does,  authorize  them  to  continue 
the  business  until  the  further  order  of  the  court.  But 
the  business  should  not  be  continued  without  such 
express  direction,  and  then  the  order  of  the  court 
should  be  strictly  followed. 

Where  the  trust  estate  is  to  be  held  for  investment, 
the  form  in  which  it  exists  at  the  beginning  of  the 
trust,  is  often,  in  part  at  least,  not  adapted  to  trust 
purposes.  An  individual  may  be  engaged  in  business, 
in  a  partnership,  or  in  the  management  of  his  prop- 
erty for  the  purpose  of  gain,  and  rarely  has  his  prop- 
erty permanently  invested  without  some  regard  to  spec- 
ulative value.  Where  a  trustee  receives  an  interest  in 
a  partnership,  in  a  business,  or  in  speculative  or  unpro- 
ductive property,  or  in  fact  in  any  property  in  which 
he  would  not  be  authorized  to  invest  under  the  terms  of 
the  instrument  or  prevailing  law,1  he  must  proceed 
immediately  to  convert  all  such  property  into  proper 
investments. 


iSee  Section  64. 


COURT  BONDS — FIDUCIARIES.  99 

In  the  absence  of  a  contrary  direction,  vacant  land, 
even  if  it  has  a  large  prospective  value,  should  be  con- 
verted, since  trust  property  should  yield  an  income. 
All  undivided  estates  should  be  converted,  since  the 
trustee  has  not  the  absolute  control  over  them.  Lease- 
holds and  all  wasting  investments,  such  for  example  as 
stock  in  mining  companies,  where  the  principal  is  being 
consumed,  should  be  converted  into  trust  investments. 
Loans  on  personal  security  should  likewise  be  con- 
verted. And  the  trustee  should  act  promptly  in  mak- 
ing these  conversions,  for  if  he  delays  beyond  a  reason- 
able time,  he  and  his  surety  will  be  liable  for  any  loss 
of  the  property. 

On  the  other  hand,  if  the  donor  of  the  trust  has 
provided  for  the  continuation  of  the  business,  or  the 
holding  of  the  particular  ^property,  or  if  he  has  left  his 
property  prudently  and  permanently  invested,  not 
with  a  view  of  speculation,  the  trustee  should  not  con- 
vert it,  unless  perhaps  the  investments  are  such  as  he 
is  forbidden  to  make  under  the  terms  of  the  trust  or 
the  law.1 

Sec.  63. — Payment  of  Debts.  If  the  estate  is  lia- 
ble for  the  payment  of  debts,  as  is  always  the  case  with 
estates  of  deceased  persons,  and  with  bankrupt  and 
insolvent  estates,  it  is  the  duty  of  the  fiduciary,  not  only 
to  pay  the  known  debts  but  to  give  notice  by  publica- 
tion, in  the  manner  provided  by  law,  of  his  appoint- 
ment, to  the  end  that  all  who  have  claims  against  the 
estate  may  have  an  opportunity  to  be  heard.  As  a 


iSee  Section  64. 


100  COURT   BONDS — FIDUCIARIES. 

rule,  no  debts  should  be  paid  until  after  the  expiration 
of  the  time  within  which  claims  may  be  filed,  for  if 
some  should  be  paid  in  full,  and  subsequent  claims 
should  make  the  estate  insolvent  so  that  the  creditors 
would  not  be  entitled  to  full  payment,  there  would 
be  an  over-payment  for  which  the  fiduciary  would  be 
liable.  Generally,  however,  there  is  no  objection  to 
paying  individual  items  which  have  a  clear  priority, 
such,  for  example,  as  taxes;  and,  in  the  case  of  estates 
of  deceased  persons,  the  funeral  expenses  of  the  de- 
ceased. Where  there  may  be  more  than  one  item  in 
a  particular  class,  payment  should  not  be  made  until 
after  the  expiration  of  the  time  for  filing  claims,  as 
there  may  be  enough  items  in  that  class  to  exhaust  the 
estate  and  leave  a  deficit. 

After  the  expiration  of  the  time  for  filing  claims, 
and  if  there  is  enough  money  in  the  estate  to  pay  all 
claims,  it  is  proper  to  pay  such  of  them  as  have  been 
found  by  the  court  to  be  proper,  retaining  on  hand 
enough  to  pay  any  that  may  be  disputed.  If  there  is 
not  enough  to  pay  all,  including  those  disputed,  then 
none  should  be  paid,  or  they  should  be  paid  only  pro 
rata,  for  if  the  estate  should  be  found  insufficient  and 
some  have  been  paid  in  full,  there  will  be  an  over-pay- 
ment for  which  the  fiduciary  will  be  liable. 

Sec>  64. — Investment  of  Funds.  As  we  have  seen, 
fiduciaries  are  divisible  into  two  classes:  those  whose 
duty  is  merely  to  distribute  the  estate  and  those 
whose  duty  is  to  hold  and  invest  it.  The  first  class 
embraces  executors,  administrators,  receivers,  assignees 
and  the  like,  and  the  second  class  includes  guardians 


COURT   BONDS — FIDUCIARIES.  101 

and  tutors  of  minors,  committees,  curators,  and  con- 
servators of  incompetents  and  certain  classes  of  trus- 
tees. When  a  fiduciary  of  the  second  class  has  ob-. 
tained  possession  of  the  estate,  and  has  converted  into 
money  so  much  of  it  as  is  necessary  to  be  converted, 
his  next  duty  is  to  invest  the  proceeds.  In,  do  ing  so 
he  must  invest  them  securely  so  that  the  principal;  wit! 
be  preserved,  and  he  must  invest  them  productive!,? 
so  that  they  will  yield  the  current  rate  of  interest/  ' 

If  there  are  directions  in  the  instrument  creating 
the  trust  as  to  the  manner  of  investing  the  funds,  those 
directions  must  be  followed;  for  the  creator  of  a  trust 
may  undoubtedly  specify  the  kind  of  investments  that 
may  be  made  with  the  trust  funds.  In  the  absence  of 
such  directions,  the  fiduciary  must  be  governed  by  the 
law  of  the  state  in  which  the  trust  is  being  executed 
and  the  rules  of  the  court  having  jurisdiction  over 
the  estate.  If  there  is  no  law  or  rule  of  court  in  rela- 
tion to  investments,  a  fiduciary  can  safely  follow  the 
rules  prescribed  for  the  investment  of  funds  of  savings 
banks  in  the  particular  state.  And  if  there  is  no  such 
rule,  or  if  it  is  not  practicable  to  follow  that  rule, 
fiduciaries  must  be  governed  by  sound  discretion  and 
good  faith,  having  in  view,  not  speculation,  but  a  per- 
manent investment,  considering  both  probable  income 
and  safety  of  principal.  They  must  observe  how  men 
of  prudence,  discretion  and  intelligence  manage  their 
own  affairs,  not  in  regard  to  speculation  but  in  regard 
to  the  permanent  disposition  of  their  funds,  considering 
the  probable  income  as  well  as  the  probable  safety  of 
principal. 


102  COURT   BONDS — FIDUCIARIES. 

This  is  known  as  the  American  rule ;  but  the  courts 
and  legislatures  in  the  various  states  have,  from  this 
rule,  evolved  very  different  results.  Having  reference 
to  the  classes  of  securities  in  which  trust  funds  may 
be  invested,  the  courts  of  New  York  have  established 
a,  rule  which  seems  to  be  fairly  satisfactory  and  reas- 
^  *gj|f e,  and  which  should  perhaps  be  followed  in 
; .states,:  unless  a  more  liberal  rule  has  been  clearly 
established  by  proper  authority.  The  New  York  rule 
is  that  trust  funds  ought  to  be  invested  in  government, 
state  or  municipal  bonds,  first  mortgage  bonds  of  cor- 
porations and  first  mortgages  on  real  estate.  Other 
states,  including  Massachusetts,  hold  that  a  fiduciary 
may  also  invest  in  stocks  of  business  corporations  such 
as  banks,  railroads  and  manufacturing  comp-anies,  and 
in  notes  of  individuals  secured  by  the  stock  of  such 
corporations,  provided  the  corporations  have  acquired, 
by  reason  of  the  amount  of  their  property  and  the  pru- 
dent management  of  their  affairs,  such  a  reputation 
that  cautious  and  intelligent  persons  commonly  invest 
their  own  money  in  such  stocks  as  permanent  invest- 
ments. There  is  no  definite  rule  for  determining  who 
are  " cautious  and  intelligent  persons"  within  the  mean- 
ing of  this  rule,  nor  when  their  investments  are  in- 
tended to  be  permanent  and  not  speculative.  At  best, 
such  securities  are  liable  to  fluctuate  in  value,  and  are 
therefore  more  or  less  speculative. 

It  is  hardly  necessary  to  add  that  the  following 
kinds  of  investments  are  everywhere  disapproved: 
loans  on  personal  security,  whether  of  one  or  more  per- 
sons ;  investments  in  business  ventures,  whether  in  trad- 


COURT   BONDS — FIDUCIARIES.  103 

ing  or  manufacturing  or  otherwise;  second  mortgages 
and  mortgages  on  leasehold  property;  unproductive 
real  estate,  and  all  investments  of  an  untried  or  specu- 
lative nature.  A  fiduciary  gains  nothing  by  making 
such  investments,  for  he  must  account  for  all  profits 
and  is  responsible  for  all  losses. 

It  is  however  not  enough  that  a  fiduciary  select 
securities  from;  one  of  the  classes  that  are  recognized 
as  proper  investments;  he  must  also  exercise  a  sound 
discretion  in  selecting  investments  within  the  author- 
ized classes.  He  must  exercise  the  same  degree  of  in- 
telligence and  diligence  that  a  man  of  average  ability 
would  exercise  in  making  his  own  investments. 

The  rule  is  that  the  question  of  whether  there  was 
a  sound  exercise  of  discretion  is  to  be  determined  ac- 
cording to  the  state  of  facts  as  they  existed  when  the 
investment  was  made,  and  not  in  the  light  of  later  de- 
velopments. But  it  is  well  known  that  the  later  de- 
velopments, if  they  show  a  loss,  are  likely  to  influence 
the  court  and  jury  in  determining  the  propriety  of  the 
investment.  A  fiduciary  therefore  owes  it  to  himself 
and  his  surety  to  use  great  care  and  conservatism  in 
investing  the  funds  under  his  control.  The  danger  of 
erring  on  the  side  of  ultra-conservatism  is  small;  for 
there  are  few,  if  any,  cases  where  a  fiduciary  has  been 
criticised  for  making  investments  so  conservative  that 
they  do  not  produce  an  acceptable  rate  of  interest.  Be- 
fore investing  in  bonds,  he  ought  to  consult  a  respon- 
sible and  conservative  bond  house,  and  likewise,  in 
making  mortgage  loans,  he  ought  to  consult  a  reliable 
expert  on  real  estate  values.  He  has  a  right  to  get 


104  COURT   BONDS — FIDUCIARIES. 

such  expert  advice,  and  if  there  is  any  incidental  ex- 
pense, to  charge  it  to  the  estate.  In  practice,  the  com- 
mission on  the  sale  and  purchase  will  generally  p-ay 
for  the  expert  advice  of  the  broker;  the  point  is  to 
select  a  competent  and  reliable  broker. 

It  is  also  the  duty  of  the  fiduciary  to  exercise  due 
care  to  keep  the  estate  invested;  and  if  he  is  negligent 
in  this  respect,  he  will  be  held  liable  for  the  income  he 
might  have  earned. 

Sec.  65. — Care  of  the  Trust  Property.  Having  ob- 
tained possession  of  the  trust  property,  having  con- 
verted into  money  so  much  of,  it  as  is  necessary  to  be 
converted,  and  having'  paid  the  debts  and  invested  the 
cash,  it  is  the  duty  of  the  fiduciary  to  take  care  of  the 
assets  of  the  estate,  and  in  so  doing,  to  use  reasonable 
skill,  prudence  and  diligence. 

We  have  seen  that,  if  a  public  officer,  deposits  pub- 
lic money  in  a  bank  and  the  bank  fails,  he  and  his 
surety  will  be  required  to  make  good  the  loss,  even 
though  the  utmost  care  was  used  in  the  selection  of  the 
bank.  It  is  not  so  with  a  fiduciary.  If  he  uses  reason- 
able care  in  the  selection  of  the  bank — if,  under  the 
circumstances,  a  reasonably  prudent  man  would  have 
put  his  own  money  in  the  bank — he  is  not  liable  for 
loss  resulting  from  the  failure  of  the  bank.  As  we 
shall  see,  however,  in  order  for  the  fiduciary  to  be  thus 
relieved,  it  must  appear  that  the  money  was  deposited 
in  the  name  of  the  estate.1  The  securities  should  be  kept 
in  a  safe  deposit  box,  and  the  box  should  be  rented  in  the 


iSee  Section  66. 


COURT    BONDS — FIDUCIARIES.  105 

name  of  the  estate.  If  the  securities  should  be  kept  in 
the  home  or  office  of  the  fiduciary,  or  even  in  an  ordinary 
iron  safe,  and  should  be  lost,  the  fiduciary  and  his  surety 
would  probably  be  held  liable  for  the  loss. 

The  improvements  on  the  real  estate  should  be  in- 
sured and  the  taxes  thereon  should  be  paid.  It  should 
be  put  in  condition  to  be  rented  and  should  be  kept  in 
repair;  and  if,  in  so  doing,  a  substantial  sum  of  money 
is  necessary,  an  order  of  court  should  be  obtained. 
Chattels  are  generally  converted  into  money,  but  if,  by 
the  terms  of  the  trust,  they  are  to  be  held  as  a  part  of 
the  estate,  they  should  be  put  in  as  safe  a  place  as  is 
reasonably  possible,  and,  if  practicable,  should  be  kept 
insured. 

Sec.  66.— Trust  Property  to  be  Kept  Separate.    A 

fiduciary  should  not,  under  any  circumstances,  com- 
mingle the  trust  property  with  his  own,  but  should 
keep  it  separate  so-  that  it  can  always  be  identified  as 
trust  property.  The  bank  account  should  be  kept  in 
the  name  of  the  estate,  or  in  the  name  of  the  fiduciary, 
followed  by  such  language  as  to  show  that  the  money 
belongs  to  the  estate;  as  for  example:  "John  Smith, 
trustee  under  the  will  of  Henry  Jones. ' '  All  the  securi- 
ties belonging  to  the  estate  should,  if  possible,  be  placed 
in  the  name  of  the  estate  so  that  they  cannot  be  trans- 
ferred to  a  third  person  except  upon  the  signature  of 
the  fiduciary;  and  the  safe  deposit  box  in  which  they 
are  kept  should  be  rented  in  the  name  of  the  estate. 
Title  to  land,  and  all  mortgages,  should  of  course  be 
taken  in  the  name  of  the  estate  or  of  the  beneficiary, 


106  COURT   BONDS — FIDUCIARIES. 

but  never  in  the  name  of  the  fiduciary,  in  his  in- 
dividual capacity.  Chattels  should  likewise  be  kept 
separate  from  the  individual  property  of  the  fiduciary 
and  identified  as  a  part  of  the  estate. 

The  importance  of  the  separation  and  identifica- 
tion of  the  trust  property  ought  not  to  be  underesti- 
mated by  the  surety.  In  the  first  place,  the  fiduciary  is 
more  likely  to  use  the  trust  property  for  his  own  ac- 
count if  it  is  mixed  with  his  own  or  stands  in  his  in- 
dividual name;  and,  in  the  second  place,  even  if  the 
fiduciary  has  no  intention  of  misappropriating  any 
part  of  the  estate,  loss  may  nevertheless  be  suffered  by 
the  surety,  in  at  least  two  ways. 

(1)  The  rule  is  that  if  a  fiduciary  uses  reasonable 
care  in  the  selection  of  a  depository  for  the  funds,  and 
deposits  them  in  the  manner  above  indicated  and  not 
in  his  individual  name,  he  and  his  surety  will  be  re- 
lieved of  liability  for  loss  resulting  from  the  failure  of 
the  bank.     But   if   he   deposits   the   funds  to   his   in- 
dividual credit,  whether  commingled  with  his  own  or 
not,  it  is  considered  a  technical  conversion  of  the  funds 
to  his  own  use;  and,  if  the  bank  should  fail,  he  and  his 
surety   would   be   liable   for   the   resulting   loss,    even 
though  the  greatest  care  may  have  been  used  in  the 
selection  of  the  depository. 

(2)  If  the  fiduciary  should  become  insolvent  and 
be  put  into  bankruptcy,  with  the  trust  funds  standing 
in  his  individual  name,  his  general  creditors  would  be 
entitled  to  th.Q  funds  as  against  the  beneficiaries  of  the 
trust;  and  the  surety  would  be  compelled  to  make  good 
the  loss.    If,  on  the  other  hand,  they  had  been  carried 


COURT   BONDS — FIDUCIARIES.  107 

in  the  name  of  the  estate,  the  creditors  would  not,  of 
course,  have  been  entitled  to  them.  If  the  other  prop- 
erty of  the  estate  could  not  be  identified  as  trust  prop- 
erty, it  likewise  would  go  to  the  general  creditors. 

Sec.  67.— Money  to  be  Kept  Under  Exclusive  Con- 
trol. The  Effect  of  Joint  Control  by  Surety.  If  a  fidu- 
ciary deposits  the  money  of  the  estate  in  such  manner 
that  it  is  not  under  his  exclusive  control,  as  where  it 
cannot  be  withdrawn  without  the  concurrence  of  other 
persons,  he  and  his  surety  will  be  liable  for  loss  result- 
ing from  the  failure  of  the  bank.  This  rule  is  based  on 
the  principle  that  it  is  the  duty  of  a  fiduciary  to  with- 
draw the  money  from  the  bank  upon  the  slightest  indi- 
cation of  danger,  and  that  he  cannot  perform  this  duty 
promptly  if  he  is  hampered  by  the  necessity  of  procuring 
the  concurrent  action  of  otheu  persons.  And  this  rule 
has  been  held  to  apply  when  a  surety  company,  for  the 
better  preservation  of  the  estate,  requires  and  exercises 
joint  control  of  the  funds  so  that  they  cannot  be  with- 
drawn except  upon  the  counter-signature  of  its  repre- 
sentative. But  of  course,  it  can  apply  only  in  those 
States  where  joint  control  by  a  surety  is  not  recognized 
and  approved  by  statute,  and  it  so  happens  that  in 
many  of  the  States  such  approval  by  statute  has  now 
been  given.1  In  States  where  joint  control  by  the  surety 


iColorado. — Colo.   Stat.  Anno.,   Sec.   937. 
Idaho.— Revised    Codes,    Sec.    2947. 

Indiana. — Burns  Anno.    Stat.,    Sees.   5732    and   5762. 

KENTUCKY.— May  be  authorized  by  Carrolls  Statutes,  1909,  Sec. 
723,  which  provides  that  a  surety  company  may  stipulate  for  in- 
demnity from  the  parties  for  whom  it  shall  become  responsible,  and 


108  COURT   BONDS — FIDUCIARIES. 

has  not  been  approved  by  statute,  it  should  be  borne  in 
mind  that  when  a  surety  company  elects  to  accept  the 
protection  afforded  by  joint  control,  it,  at  the  same 
time,  becomes  a  guarantor  of  the  continued  solvency 
of  the  depository. 

Sec.  68.— Periodical  Accounting.  It  is  the  duty 
of  all  fiduciaries,  periodically,  to  file  reports  and  ac- 
counts of  their  administration,  showing  what  assets  have 
been  received  and  what  disposition  has  been  made  of  them. 
The  time  when  such  periodical  accounts  should  be  filed 
is  usually  regulated  by  statute  or  rule  of  court,  but 
the  general  rule  is  that  an  account  should  be  filed  at 
least  once  a  year.  Where  a  fiduciary,  under  order  of 
court,  is  conducting  a  business  belonging  to  the  estate,2 
he  should  report  much  more  frequently,  say  once  a  month, 
in  order  that  the  court  may  determine  whether  or  not 


enforce  any  bond,  contract,  agreement,  pledge  or  other  security  made 
or  given  for  that  purpose. 

MARYLAND.— Code,  Art.  93,  Sec.  39. 

MASSACHUSETTS. — With    the    approval    of    the    Court   appointing 
the  fiduciary].     Rev.  Laws,  1902,  Ch.  118,  Sec.  61,  p.  1150. 

MICHIGAN.— Howell's    Statutes.      Sec.    8170.      Comp.    Laws,    1807, 
Sec.  5201 

MONTANA.— Revised  Code,  1907,  Sec.  4181. 
NEW  JERSEY.— Comp.   Stat,  1910,  p.  2852. 

PENNSYLVANIA.— P.   L.,   1895,  p.  344.     Sec.   2.      Purdon's  Digest 
(13th  Ed.)   p.  4522. 

VERMONT.— -Wih    the    approval   of    the    Court.      Pub.    Stat.,    1906, 
Sec.    4787. 

WEST  VIRGINIA.— May  be  authorized  by  Code  1913,  Sec.  3184,  a 
provision  similar  to   that   in   Kentucky. 

WISCONSIN.— Statutes,  1911,   Sees.   1966-37. 
2  See  Section  62. 


COURT   BONDS — FIDUCIARIES.  10& 

the  business  should  be  further  continued.  This  is  gen- 
erally regulated  by  the  order  authorizing  the  continu- 
ance of  the  business.  The  surety  should  insist  that  the 
proper  reports  and  accounts  be  rendered  so  that  he 
may  be  advised  of  any  neglect  or  improper  conduct  on 
the  part  of  the  principal. 

Sec.  69. — Distribution  of  the  Estate.  It  is  the  duty 
of  a  fiduciary  to  distribute  the  estate  as  soon  as  the 
proper  time  comes  for  him  to  do  so ;  and  if  he  holds  the 
estate  an  unreasonable  length  of  time  after  distribution 
should  be  made,  he  subjects  himself  and  his  surety  to 
certain  extraordinary  risks.  The  rule  is  that  a  fidu- 
ciary is  bound  to  account  for  what  was,  or  ought  to 
have  been,  on  hand  when  final  distribution  was  due; 
and  if,  after  that  time,  a  part  or  all  of  the  estate  should 
be  lost,  even  without  his  fault,  he  and  his  surety  would 
ordinarily  be  liable  for  the  loss.  If,  for  example,  the 
bank  in  which  the  money  was  deposited  should  fail,  he 
would  be  liable  for  the  loss,  notwithstanding  he  may 
have  used  due  care  and  had  deposited  the  money  in 
the  name  of  the  estate.  So  also,  if  an  investment,  which 
was  proper  when  made,  should  depreciate  in  value  or 
become  worthless  after  the  time  when  distribution  was 
due,  he  would  be  liable.  . 

It  is  not  possible  to  state  in  advance  when  distri- 
bution in  each  case  should  be  made ;  but  it  may  be  said, 
in  a  general  way,  that  estates  of  deceased  persons  can 
ordinarily  be  closed  within  a  year ;  and  that  much  time 
is  always  allowed.  There  are,  of  course,  many  cases 
where  more  than  a  year  is  necessary;  but  as  soon  as 


110  COURT   BONDS — FIDUCIARIES. 

the  debts  are  paid  and  the  distributees  ascertained,  the 
distribution  should  be  made.  The  estate  of  a  minor 
should  be  transferred  to  him  as  soon  as  possible  after 
he  reaches  his  majority.  A  bankrupt  or  insolvent  estate 
should  be  distributed  as  soon  as  the  assets  have  been 
converted  into  money  and  the  number  and  amount  of 
the  claims  have  been  ascertained.  Where  a  consider- 
able part  of  the  assets  have  been  converted,  a  partial 
distribution  may  be  made. 

A  fiduciary  must  not  only  distribute  the  estate 
promptly  when  distribution  is  due,  but  he  must,  at  his 
peril,  distribute  it  properly.  If  he  distributes  the 
wrong  amount  or  pays  it  to  the  wrong  person,  he  must 
bear  the  loss.  The  fact  that  he  has  been  diligent  or 
has  taken  advice,  will  not  save  him.  The  only  protec- 
tion is  to  obtain  a  decree  of  distribution,  and  he  should 
see  that  all  parties  in  interest  are  parties  to  the  suit 
so  that  the  decree  will  be  binding  upon  them.  If  there 
is  any  doubt  as  to  whether  all  parties  have  been  joined, 
he  may  require  the  distributees  to  give  bond  to  indem- 
nify him  and  his  surety  against  loss,1  and  the  surety 
should  for  its  own  protection  see  that  such  bonds  of  in- 
demnity are  given. 

Likewise  the  fiduciary  must,  at  his  peril,  pay  the 
distributive  shares  to  the  identical  persons  named  in 
the  decree,  or  to  their  proper  representatives.  The  fact 
that  he  pays  on  a  forgedj  order,  an  invalid  assignment 
or  a  power  of  attorney  which,  unknown  to  him,  has 
been  revoked,  will  not  protect  him.  He  must  pay  the 


iSee  Section  159. 


COURT   BONDS — FIDUCIARIES.  Ill 

share  of  a  minor,  or  other  incompetent,  to  his  legal  rep- 
resentatives and  no  other. 

Sec.  70.— Liability  of  Surety  for  Debts  due  by 
Fiduciary.  If  a  fiduciary  is  indebted  to  the  estate  com- 
mitted to  his  care,  the  amount  of  the  debt  automatically 
becomes  assets  of  the  estate,  no  formal  transfer  from 
himself  individually  to  himself  in  his  fiduciary  capacity 
being  necessity.  He  will  be  required,  as  fiduciary,  to  ac- 
count for  the  amount  of  the  debt  as  so  much  cash ;  and 
this  entirely  irrespective  of  his  ability,  in  point  of  fact, 
to  pay  the  debt. 

Inasmuch  as  the  surety  for  a  fiduciary  is  liable  for 
all  assets  that  come  into  the  hands  of  the  principal, 
and  inasmuch  as  a  debt  due  by  the  fiduciary  to  the 
estate  is  treated  as  an  asset,  it  follows  that  the  surety 
for  such  a  fiduciary  guarantees  the  continued  solvency 
of  the  principal  and  his  ability  to  pay  the  debt.  This 
is  an  extraordinary  risk  which  a  surety  company  ought 
not  to  assume  unless  the  fiduciary  is  abundantly  able  to 
pay  the  debt.  The  signing  of  the  bond  is  equivalent  to 
endorsing  a  note  of  the  principal  for  the  amount  due 
the  estate. 

Sec.  71.— Liability  for  Acts  in  Excess  of  Authority. 

While  a  fiduciary  must  be  diligent  to  perform  the 
duties  imposed  upon  him  by  law,  he  must,  at  the  same 
time,  be  careful  not  to  exceed  his  powers.  He  is  bound 
to  observe  the  limitations  of  the  law;  and,  if  loss  result 
to  the  estate  from  an  act  in  excess  of  his  powers,  he 
and  his  surety  will  be  liable. 

If,  for  example,  he  sells  any  of  the  trust  property 
without  having  power  to  do  so,  or  makes  an  unau- 


112  COURT   BONDS — FIDUCIARIES. 

thorized  conversion,1  he  may  be  compelled  to  replace  the 
property  in  kind  or  make  good  any  subsequent  increase 
in  its  value.  If  he  makes  an  authorized  payment,  he 
will  be  compelled  to  replace  the  amount  so  paid.  He 
can  generally  protect  himself  by  procuring  an  order  of 
court;  and  he  should  not  sell  any  of  the  property,  con- 
vert any  of  it  into  money,  make  any  payment,  or  do 
any  other  act  that  may  result  in  loss,  without  obtaining 
such  an  order;  and  the  terms  of  the  order  should  be 
strictly  and  exactly  followed.  If  the  court  is  one  of  lim- 
ited statutory  jurisdiction,  he  should  be  careful  to  as- 
certain that  the  court  has  jurisdiction  to  make  the  order. 
Where  the  directions  in  the  instrument  creating  the 
trust  are  clear  and  explicit,  it  is  not  so  important  to 
obtain  an  order  of  court.  But  no  harm  will  be  done; 
and  it  is  advisable  to  do  so,  particularly  if  there  is  any 
possibility  of  a  different  construction  of  the  instrument. 

Sec.  72.— The  Exercising  of  Joint  Control  by  Sure- 
ty. We  have  seen  that  it  is  fast  becoming  the  uniform 
practice  of  surety  companies  to  require  all  fiduciaries  to 
give  the  representative  of  the  company  joint  control  of 
the  assets  of  the  estate.  Joint  control  is  desirable  be- 
cause, first,  it  will  prevent  the  fiduciary  from  appropri- 
ating the  estate  to  his  own  use;  and,  second,  it  will 
enable  the  surety,  in  a  measure,  to  see  that  the  princi- 
pal properly  performs  his!  duties  and  that  he  pays  out 
the  estate  only  for  proper  purposes — purposes  which 
are  authorized  by  law,  and  which  the  court  having 
jurisdiction  has  approved,  or  is  legally  bound  to 


iSee  Section  62. 


COURT   BONDS — FIDUCIARIES.  113 

approve.  This,  however,  is  not  a  merely,  perfunctory 
matter  of  countersigning  checks.  It  requires  consid- 
erable knowledge  and  care  on,  the  part  of  the  surety's 
representative,  as  shown  by  the  fact  that  one  company, 
in  making  a  partial  examination  into  the  causes  of  its 
losses  during  the  year  1912,  found,  in  the  cases  ex- 
amined, a  loss  of  nearly  $20,000.00  directly  attributable 
to  the  fact  that  its  representatives  permitted  money 
of  which  they  had  joint  control  to  be  improperly  with- 
drawn and  expended.  The  experience  of  the  other 
companies  is  probably  just  as  bad,  or  nearly  so. 

In  exercising  joint  control,  the  surety  company's 
representative  should  see  that  the  estate  is  converted 
into  the  proper  form,1  that  the  debts  of  the  estate  are 
paid,  but  only  at  the  proper  time  and  in  the  proper 
order  ;2  that  the  funds  are  properly  invested  ;3  that  any 
cash  that  may  be  on  hand  is  put  in  a  carefully  selected 
bank,  the  securities  in  a  safe  deposit  box,  and  that  the 
other  assets  are  properly  cared  for;4  that  the  trust 
property  is  kept  separate  and  identified  as  trust  prop- 
erty;5 that  the  assets  are  properly  distributed;6  and 
that  the  principal  does  not  exceed  his  authority.7 

In  order  for  a  company  to  be  perfectly  safe  in  the 
handling  of  its  joint  control  cases,  it  would  perhaps  be 
necessary  to  put  the  matter  in  charge  of  an  attorney, 
especially  trained  in  the  handling  of  estates.  This  it  is 


iSee  Section  62. 
2See  Section  63. 
sSee  Section  64. 
4See  Section  65. 
sSee  Section  66. 
eSee  Section  69. 
7See  Section  71. 


114  COURT   BONDS — FIDUCIARIES. 

not  always  practicable  to  do;  but  if  those  who  are  re- 
quired to  exercise  joint  control  will  keep  in  mind  what 
has  been  said  in  the  preceding  pages  regarding  the 
duties  and  liabilities  of  fiduciaries,  and  will  use  their 
common  sense  and  some  care,  there  ought  not  to  be  any 
difficulty.  There  are  three  tests  which  should  be  ap- 
plied to  every  payment  the  surety  is  asked  to  authorize. 

I.  Is  it  a  proper  payment  in  the  opinion  of  the 
surety's  representative?    If  the  payment  is  for  invest- 
ment, is  it  a  proper  investment?     If  for  the  payment 
of  a  debt,  is  the  debt  a  proper  one  to  be  paid  at  the 
time?    If  a  distribution,  is  it  being  made  at  the  proper 
time  and  to  the  proper  person?     Is  the  principal  act- 
ing within  his  authority? 

II.  Has  the  payment  been  approved  by  the  court 
having  jurisdiction?     Ordinarily  such  approval  should 
be  a  condition  precedent  to  the  countersigning  of  any 
checks,  and  this  rule  applies  to  the  following  payments, 
which  are  sometimes  made  without  an  order  of  court: 

a.  The  payment  of  the  funeral  expenses  of 
the   deceased.     However,   this   expense   is   gen- 
erally  the    first    preferred    claim    against    the 
estate,  so  that  if  there  is  any  particular  occa- 
sion for  haste,  it  is  reasonably  safe  to  waive  the 
order  of  court. 

b.  Any  special  statutory  allowance  in  favor 
of  the  widow  or  children  of  a  deceased  person. 
If,  however,  the  right  to  the  payment  is  abso- 
lute or  depends  solely  upon  the  judgment  or 
discretion  of  the  fiduciary,  the  order  may  be 
waived. 


COURT   BONDS — FIDUCIARIES.  115 

c.  All   claims  against  the  estate  whether 
preferred  or  not.     None  of  the  claims  should  be 
paid  until  after  the  expiration  of  the  time  within 
which  claims  may  be  allowed.     Then  an  account 
showing  the  claims  to  be  paid  should  be  filed; 
and  upon  aproval  of  the  same  by  the  court,  the 
debts  may  be  paid. 

d.  All  payments  for  the  support  and  main- 
tenance of  the  beneficiaries'  of  the  estate.    It  is 
necessary  to  be  careful  in  such  cases,  for  guard- 
ians of  minors  and  conservators  of  the  estates  of 
incompetents  often  assume  they  have  the  right 
to  support  the  beneficiary  out  of  the  estate  when 
in  fact  they  have  not. 

e.  All  investments,  unless  the  funds  are  to 
be  invested  in  a  security  which  has  already  been 
approved  by  the  court,  or  which  the  court  is 
bound  to  approve. 

III.  Has  the  payment  been  expressly  approved  by 
the  attorney  for  the  estate  ?  This  should  also  be  a  con- 
dition precedent  to  the  countersigning  of  any  check. 
This  is  necessary  not  only  where  an  order  of  court  is 
waived,  but  also  for  the  purpose  of  determining  that 
any  order  that  may  have  been  issued  is  being  properly 
interpreted.  Where  the  attorney  is  a  man  of  reason- 
ably good  standing  at  the  bar,  his  approval  may  be 
permitted  to  carry  considerable  weight,  although  it 
cannot  be  absolutely  relied  upon  in  all  cases,  and  it  is 
often  of  advantage  to  call  his  attention  to  any  apparent 
irregularity  or  impropriety  in  the  payment.  The  or- 


116  COURT   BONDS FIDUCIARIES. 

dinary  attorney,  not  having  come  directly  in  contact 
with  the  hard  knocks  to  which  surety  companies  have 
been  subjected,  does  not  realize  the  importance  of 
keeping  strictly  within  the  letter  of  the  law.  It  is  really 
astounding,  in  the  light  of  the  experience  of  surety 
companies,  to  note  the  apparent  freedom  with  which 
good  attorneys  advise  their  clients  who  are  fiduciaries 
to  ignore  or  disobey  the  law.  A  good  surety  man  is 
generally  a  safer  adviser  than  an  attorney  who  has  not 
been  specially  trained  in  the  handling  of  estates. 

All  three  of  these  tests  should  be  applied  as  far  as 
may  reasonably  be  possible.  In  some  cases,  it  may  not 
be  feasible  to  require  the  express  approval  of  the  court, 
but  in  no  event  should  any  payment,  about  which  the 
surety's  representative  has  any  doubt,  or  which  has 
not  the  active  and  express  approval  of  the  attorney, 
be  allowed ;  and  the  order  of  court  should  not  be  waived 
unless  there  is  some  good  reason  for  it,  and  unless  the 
ability  and  good  faith  of  the  attorney  are  undoubted. 

Sec.  73. — Substituted  Surety.  In  the  foregoing 
treatment  of  the  subject  of  bonds  of  fiduciaries,  it  has 
been  assumed  that  the  application  for  the  bond  will 
be  made  at  the  time  of  the  appointment  of  the  fiduciary 
and  before  he  begins  to  act  as  such.  It  is  considered 
bad  policy  to  execute  a  bond  for  a  fiduciary  who  has 
previously  been  acting  under  another  bond.  The  extra 
hazards  in  such  a  case  may  be  summarized  as  follows : 

1.  The  bond  may  be  construed  to  cover  the  entire 
time  during  which  the  fiduciary  has  been  acting  as  such, 
so  that  the  surety  may  be  held  liable  for  existing  as  well 
as  future  defaults. 


COURT   BONDS — FIDUCIARIES.  117 

2.  Even  if  the  bond  should  not  be  construed  to 
cover  the  entire  period,  it  is  difficult  in  many  cases  to 
tell  just  when  a  default  was  committed ;  and  the  chances 
are  that  if  the  first  surety  should  not  be  solvent,  the  sub- 
stituted surety  would  be  held  liable  for  any  default  that 
might  be  found  to  exist,  even  though  it  may  be  thought 
that  the  default  occurred  before  the  new  bond  was 
executed. 

3.  The  fact  that  a  new  bond  is  desired  is  evidence, 
either  that  the  former  surety  was  suspicious   of  the 
pTincipal  and  obtained  a  statutory  release,  or  that  the 
beneficiaries  became  suspicious  and  asked  for  an  ad- 
ditional bond  for  their  protection.     Neither  of  these 
suppositions  is  necessarily  true,  but  the  presumption 
is  in  favor  of  the  truth  of  one  or  the  other  of  them. 

On  the  whole,  therefore,  it  is  considered  the  part 
of  wisdom  to  decline  all  such  applications,  unless  it 
is  shown  positively  that  the  estate  is  intact  at  the  time 
and  that  no  suspicion  of  wrong  doing  attaches  to  the 
applicant.  Joint  control  should,  of  course,  be  required 
in  such  cases.1 

Sec.  74.— Termination  of  Liability.  The  bond  of  a 
fiduciary  is  a  continuing  obligation;  that  is  to  say, 
unless  it  is  terminated  in  the  manner  provided  by  law, 
it  will  continue  in  force  so  long  as  the  principal  con- 
tinues to  act  in  his  capacity  as  fiduciary.  The  fact 
that  the  principal  may  file  a  new  bond,  or  fail  to  p-ay 
the  annual  premium  provided  for  in  his  contract  with 
the  surety,  will  not  release  the  surety  from  liability. 


iSee  Section  58. 


118  COURT   BONDS — FIDUCIARIES. 

And  furthermore,  inasmuch  as  probate  courts  having 
jurisdiction  over  the  majority  of  fiduciaries  are  ordin- 
arily courts  of  limited  jurisdiction,  with  the  right  to 
exercise  only  the  powers  that  have  been  given  them  by 
statute,  such  courts  have  no  right,  in  the  absence  of 
an  express  statutory  provision,  to  relieve  a  surety  from 
liability,  even  though  a  new  bond  with  another  surety 
be  required  and  given.  And  if  there  is  a  statutory 
provision  authorizing  the  court  to  release  the  surety, 
the  statute  must  be  strictly  followed,  or  the  order 
granting  the  release  will  be  void. 

As  a  matter  of  fact,  the  statutes  of  nearly  all  the 
states  do  provide  that  sureties  on  the  bonds  of  fidu- 
ciaries may,  under  certain  conditions,  obtain  a  release 
from  future  liability,  remaining  liable  always  for  any 
default  that  may  have  occurred  prior  to  the  date  of  the 
release.  (The  statutes  in  the  several  states  are  by  no 
means  uniform,  but  the  method  of  procedure  generally 
prescribed  is  for  the  surety  to  file,  with  the  court  in 
which  the  bond  was  filed,  a  petition  asking  to  be  re- 
lieved of  future  liability.  The  court  is  authorized,  or 
required,  upon  such  petition,  to  order  the  fiduciary  to 
account  and  file  a  new  bond;  and  upon  the  filing  and 
approval  of  the  account  and  the  new  bond,  the  court  is 
authorized  to  enter  an  order  releasing  the  surety  from 
liability  for  the  future  acts  and  defaults  of  the  prin- 
cipal. If  the  principal  fails  to  acount  and  file  a  new 
bond,  in  response  to  the  order  of  the  court,  he  may  be 
attached  for  contempt  of  court  and  may  be  removed. 

In  some  states,  the  application  of  the  surety  for  a 


COURT   BONDS — FIDUCIARIES.  119 

release  will  be  granted  as  a  matter  of  right;  that  is  to 
say,  the  court  is  bound,  upon  the  filing  of  the  petition 
of  the  surety,  to  make  the  necessary  orders  looking  to 
the  release  of  the  surety.  In  other  states,  the  release 
will  be  granted  only  when  the  surety  alleges  and  proves, 
to  the  satisfaction  of  the  court,  a  reason  for  his  request ; 
such  as,  that  the  principal  is  mismanaging  the  estate 
or  that  the  surety  is  in  danger  of  loss.1 


iThe  laws  of  the  several  States  on  this  subject  may  be  sum- 
marized briefly  as  follows : 

CALIFORNIA. — Surety  for  executor  or  administrator  may  effect  a 
cancellation  as  to  future  liability.  Sees.  1403-5,  Code  Civil  Proc. 

Surety  for  guardian  may  be  released  after  due  notice  given  "when 
it  shall  appear  that  no  injury  can  result  therefrom  to  those  inter- 
ested in  the  estate."  Sec.  1803,  Code  Civ.  Proc. 

COLORADO. — Surety  for  any  fiduciary  may  effect  a  cancellation  as 
to  future  liability.  Sec.  936,  Colorado  Statutes  Annotated. 

CONNECTICUT.  Surety  upon  any  bond  taken  by  a  Court  of  Pro- 
bate may,  upon  petition,  be  released  upon  a  hearing  of  all  parties 
interested  "it  does  not  appear  that  to  grant  such  application  would 
prejudice  said  estate."  Sec.  214,  General  Statutes,  Rev.  of  1902. 

GEORGIA. — Surety  on  bond  of  guardian  may  be  released  at  the  dis- 
cretion of  the  Ordinary.  Sec.  3052,  Code  of  Georgia.  Surety  for 
trustee  may  be  released  at  the  discretion  of  the  judge  of  the  Superior 
Court.  Sec.  3776,  Code  of  Georgia. 

Surety  for  administrator  may  be  released  in  the  same  way.  Sec. 
3976,  Code  of  Georgia. 

Can  surety  for  executor  effect  a  cancellation  of  the  bond?  See 
Sec.  3891,  Code. 

IDAHO. — Surety  for  any  fiduciary  may  effect  a  cancellation  as  to 
future  liability.  Revised  Codes,  Sec.  2946. 

ILLINOIS. — Surety  for  executor  or  administrator  may  effect  a  can- 
cellation as  to  future  liability.  Rev.  Statutes,  1909,  Ch.  3,  Sees. 
35-36,  p.  119. 

Surety  for  guardian,  conservator  or  trustee  may  effect  cancellation 
as  to  future  liability.  Rev.  St.,  1909,  Ch.  103,  Sec.  15,  p.  1564. 

INDIANA. — Surety  for  executor,  administrator,  administrator  with 
the  will  annexed  or  de  tonis  non  may  effect  a  cancellation  as  to 
future  liability.  Sec.  2769.  Burns  Anno.  St.  Surety  for  a  guardian 
has  same  privilege!.  Sec.  3061,  Burns  Annotated  St. 

IOWA. — Surety  for  any  person  holding  a  fiduciary  office  or  trust, 
administrator,  executor,  guardian  or  trustee  may  effect  a  cancella- 
tion as  to  future  liability.  Sec.  1177-b  of  the  Supp.  to  the  Code  of 
Iowa. 

KANSAS. — Surety  for  executor  or  administrator  may  be  released 
by  probate  court  "when  such  court  is  of  opinion  that  there  is  good 
reason  therefor."  Sec.  3622.  General  Statutes,  1909.  Surety  for 
guardian  may  be  released  in  same  way.  Sec.  3996,  G.  S.,  1909. 

KENTUCKY. — Surety  of  personal  representative  [executor  or  ad- 
ministrator (?)],  guardian,  curator,  assignee  or  trustee,  committee  of  a 
lunatic  master,  commissioner  or  receiver  may  effect  a  cancellation 
as  to  future  liability,  and  may  in  some  cases  obtain  indemnity  for 
such  as  may  have  been  incurred.  Sec.  4659,  Carroll's  Kentucky 
Statutes,  1909. 

MARYLAND. — Surety  for  any  fiduciary  may  effect  a  cancellation  as 
to  future  liability.  Art.  90,  Sec.  6,  Annotated  Code. 


120  COURT   BONDS — FIDUCIARIES. 

When  the  statute  gives  the  surety  an  absolute  right, 
upon  application,  to  be  relieved  of  future  liability,  it  is 
reasonably  prudent  to  take  that  fact  into  consideration 
in  passing  upon  applications.  But  where  the  granting 
of  the  release  is  in  discretion  of  the  court,  to  be  exer- 


MASSACHTJSETTS. — Surety  on  any  bond  given  to  a  judge  of  pro- 
bate may  be  released  from  future  liability  "if  the  court,  after  notice  to 
all  persons  interested,  finds  such  discharge  reasonable  and  proper." 
Ch.  149,  Sees.,  15-17,  Rev.  Laws  1902,  p.  1336. 

MICHIGAN. — Surety  upon  any  bond  given  to  the  probate  court  may 
effect  a  cancellation  as  to  future  liability.  Howell's  Statutes,  Sec. 
8171.  Comp.  Laws  1897,  Sec.  5202. 

MINNESOTA. — Surety  on  any  probate  bond  may  effect  a  cancella- 
tion as  to  future  liability  General  Statutes  1913,  Sec.  7423. 

MISSISSIPPI. — Surety  for  executor  or  administrator  may  effect  a 
cancellation  as  to  future  liability.  Code  of  Miss.,  1906,  Sec.  2038. 
Surety  for  guardian  may  be  discharged  from  future  liability  if  he 
is  in  danger  of  loss ;  and  mere  apprehension  of  loss  or  desire  to  be 
relieved  is  not  sufficient.  Discretion  of  the  court  controls.  Code  of 
1906,  Sec.  2407  and  notes. 

MISSOURI. — 'Any  person  bound  as  surety  on  any  bond  given  by  any 
officer,  including  executors,  administrators,  guardians,  curators,  as- 
signees, receivers,  trustees,  may  be  released  from  future  liability 
on  application  to  the  court  authorized  to  take  and  approve  such 
bond,  but  the  matter  is  in  the  discretion  of  the  court.  Rev.  Statutes 
1909,  Sees.  11281-88. 

MONTANA. — 'Surety  for  executor  or  administrator  may  effect  a 
cancellation  as  to  future  liability.  Rev.  Code  of  1907,  Sees.  7467-69. 

Probate  court  may  discharge  surety  on  guardian's  bond  "when 
it  shall  appear  that  no  injury  can  result  therefrom  to  those  inter- 
ested in  the  estate."  No  express  provision  by  which  surety  may 
start  the  proceeding.  Rev.  Code,  1907,  Sec.  7810. 

NEVADA. — Surety  on  the  official  bond  of  any  executor  or  adminis- 
trator or  on  the  bond  of  any  person  where  by  law  a  bond  or  under- 
taking is  required  may  effect  a  cancellation  as  to  future  liability. 
Rev.  Laws,  1912,  Sees.  2880-82. 

NEW  HAMPSHIRE. — Surety  for  any  fiduciary  may,  in  the  discre- 
tion of  the  judge  of  the  probate  court,  be  released  from  future  liability. 
Pub.  St.,  Ch.  199,  Sec.  3,  p.  648. 

NEW  JERSEY. — Surety  for  any  trustee,  committee,  guardian,  as- 
signee, receiver,  executor,  or  administrator,  may  effect  a  cancella- 
tion as  to  future  liability.  Compiled  Statutes,  1709-1910,  p.  5051; 
P.  L.,  1894,  p.  222. 

NEW  YORK. — Surety  for  any  fiduciary  may  effect  a  cancellation  as 
to  future  liability.  Sec.  812,  Code  Civ.  Proc. 

NORTH  CAROLINA. — Surety  for  guardian  may  be  released  if  he  "is 
in  danger  of  sustaining  loss  by  his  suretyship,"  and  if,  upon  a  hear- 
ing, "the  Clerk  of  the  Superior  Court  deems  the  surety  entitled  to 
relief."  Pell's  Revisal  of  1908,  Sec.  1783.  Surety  for  executor,  ad- 
ministrator or  collector  has  same  remedy.  Pell's  Revisal,  Sec.  33. 

OHIO. — Surety  for  executor  or  administrator  may  be  released  if 
court  is  of  opinion  there  is  good  reason  therefor.  Sec.  6204,  Bates 
Annotated  Statutes. 

Surety  for  guardian  may  effect  a  cancellation  as  to  future  liability. 
Sec.  6273,  Bates  Annotated  Statutes. 

Surety  for  assignee  or  trustee  may  be  released  "if  the  court 
is  satisfied  of  the  reasonableness  of  the  application."  Sec.  6339, 
Bates  Anno.  St. 


COURT   BONDS — FIDUCIARIES.  121 

cised  only  upon  cause  shown,  the  provision  is  not  of 
much  practical  value.  The  court  will  ordinarily  not 
grant  the  petition  unless  there  is  an  allegation  and 
proof  of  mismanagement;  and  it  is  generally  not  wise 
for  a  surety  to  allege  and  prove  that  the  principal  has 
dissipated  any  part  of  the  estate,  and  thereby  precipi- 
tate a  liability.  Furthermore,  the  procedure  under  such 
a  statute  is  generally  cumbersome  and  more  or  less  ex- 
pensive, involving  the  taking  of  testimony.  While  such 


OREGON. — Surety  for  any  fiduciary  may  effect  a  cancellation  as 
to  future  liability.  Lord's  Oregon  Laws,  Sec.  685. 

PENNSYLVANIA. — Surety  for  any  fiduciary  may  obtain  release  from 
future  liability  "if  the  court,  after  due  notice  to  all  the  parties 
interested,  deem  it  reasonable  and  proper."  P.  L.,  1907,  Ch.  384. 
Purden's  Digest,  13th  Ed.,  Supp.  1905  to  1909,  p.  6057. 

RHODE  ISLAND. — Surety  for  any  fiduciary  may  be  released  on  his 
petition  if  it  appears,  upon  a  hearing  of  all  parties  interested,  that 
the  petition  can  be  granted  without  prejudice  to  the  estate.  General 
Laws,  1909,'  title  XXXIII,  Sec.  12,  p.  1165. 

SOUTH  CAROLINA. — Surety  on  administration  bond,  who  conceives 
himself  in  danger  of  being  injured  by  the  suretyship,  may  petition 
the  probate  court  for  relief,  and  the  court  may  make  such  order  for 
the  relief  of  the  petitioner  "as  may  not  impair  or  effect  the  rights 
of  the  parties  interested  in  the  estate."  Code  of  1902,  Sec.  2520. 

Surety  for  guardian  may  be  relieved  upon  the  same  terms  and 
conditions.  Code  1902,  Sec.  2671. 

TEXAS. — Surety  for  executor  or  administrator  may  be  released 
from  further  liability  if  the  County  Judge  is  "satisfied  that  a  new 
bond  should  be  required."  Sayle's  Civil  Statutes,  Arts.  1952-56. 

Surety  for  guardian  may  be  released  from  future  liability  upon 
same  conditions.  Art.  2608. 

UTAH. — Surety  for  any  fiduciary  may  effect  a  cancellation  as  to 
future  liability.  Compiled  Laws  1907,  Sec.  430-5. 

VERMONT. — Surety  for  executor,  administrator,  trustee  or  guar- 
dian may  be  released  "if  upon  notice  and  hearing  it  appears  to  the 
court  that  such  surety  is  in  danger  of  being  injured."  Public  Statutes 
1906,  Sec.  3022.  See  also  Sec.  3175. 

VIRGINIA. — See  Sec.  179,  Pollard's  Code. 

WEST  VIRGINIA. — Surety  on  any  bond  which  is  required  to  be 
approved  by  any  court,  board  or  officer  may  terminate  his  liability. 
Code  1913,  Sees.  271-2.  See  also  Sees.  4035-36. 

WASHINGTON — Surety  for  any  executor  or  administrator,  or  on 
the  bond  or  undertaking  of  any  person  where  by  law  a  bond  or 
undertaking  is  required,  may  effect  a  cancellation  as  to  future  lia- 
bility. Ballinger's  Code,  Sees.  1529-32. 

Surety  for  any  guardian  may  be  released  upon  the  same  conditions. 

WISCONSIN. — Surety  for  any  fiduciary  may  effect  a  cancellation  as 
to  future  liability.  Sec.  4281-b,  Wisconsin  Statutes  1911. 

WYOMING. — Surety  for  executor  or  administrator  may,  in  the  dis- 
cretion of  the  court,  be  released  from  future  liability.  Compiled 
Statutes,  Sees.  5544-46. 

Court  may  require  new  bond  to  be  given  by  a  guardian  and  may 
discharge  the  existing  sureties  from  further  liability;  but  there 
is  no  provision  by  which  surety  may  start  the  proceeding.  Comp. 
Statutes,  Sec.  5783. 


122  COURT   BONDS — FIDUCIARIES. 

a  statute  may  be  of  advantage  in  some  cases,  it  is  gen- 
erally not  prudent,  in  passing  on  an  application,  to 
put  any  dependence  in  it. 

There  are  many  cases  which,  may  be  accepted  where 
there  is  a  satisfactory  provision  for  release,  but  which 
would  have  to  be  declined  where  there  is  no  such  provi- 
sion. Where  the  bond  is  to  continue  in  force  only  for 
a  short  time,  the  matter  is  not  so  important.  But  where 
the  bond  will  be  in  force  for  a  long  period,  as  in  the  case 
of  guardians  of  young  children  and  the  like,  it  will 
often  happen  that  a  risk,  which  appeared  to  be  good 
when  the  bond  was  signed,  will  turn  out  to  be  undesir- 
able before  the  termination  of  the  trust.  In  considering 
applications  for  such  bonds,  in  states  where  there  is  no 
satisfactory  provision  for  release,  great  care  ought  to 
be  exercised;  and  they  should  be  issued  only  for  appli- 
cants of  the  highest  class,  or  where  strict  joint  control 
is  obtained. 

The  limitations  upon  the  power  of  a  probate  court 
to  release  a  surety  for  a  fiduciary,  and  the  effect  of  the 
giving  of  a  new  bond  by  the  fiduciary  are  matters  which 
are  very  often  misunderstood.  It  may  be  well,  there- 
fore, to  make  it  perfectly  clear,  even  at  the  expense  of 
some  repetition,  (1)  that  a  surety  for  a  fiduciary  can  be 
relieved  of  liability  only  when  the  method  (if  any) 
pointed  out  in  the  statute  has  been  strictly  followed; 
(2)  that  the  mere  giving  of  a  new  bond  by  a  fiduciarjr 
has  absolutely  no  effect  upon  the  liability  of  the  surety 
on  the  original  bond,  except  perhaps  to  make  the  sure- 
ties on  both,  bonds  jointly  liable;  and  (3)  that,  where 


COURT   BONDS — FIDUCIARIES.  123 

the  statutory  provisions  for  release  have  not  been 
strictly  complied  with,  an  order  of  the  probate  court, 
directing  that  the  surety  on  the  original  bond  be  re- 
leased is  absolutely  void. 

The  fact  that  so  many  people  fail  to  understand 
and  appreciate  these  three  propositions  leads  to  many 
complicated  and  embarrassing  situations.  It  often  hap- 
pens that  a  fiduciary  tires  of  paying  the  annual  pre- 
mium to  the,  surety  company,  or  objects  to  the  surety 
company's  requests  for  information,  and  thereupon  files 
a  new  bond  with  personal  sureties  and  refuses  to  pay 
further  premiums,  contending  that  the  original  surety 
is  released  by  the  filing  of  the  new  bond.  He  conse- 
quently feels  that  the  surety  company  is  trying  to 
"  gouge "  him  when  it  demands  that  the  premium  be 
paid  or  that  a  valid  statutory  release  be  obtained.  If 
there  is  no  statutory  provisions  for  release,  the  surety 
must  of  course  carry  the  liability  and  ought  therefore 
to  be  compensated.  Where  there  is  a  provision  for  re- 
lease, and  the  surety  attempts  to  obtain  a  release  by 
petition,  the  principal  often  refuses  to  file  another  bond, 
contending  that  the  bond  already  filed  is  sufficient.  That 
bond  however  is  not  sufficient,  for  the  statute  provides 
that  a  bond  must  be  filed  in  response  to  the  petition,  and 
a  bond  filed  prior  to  the  petition  does  not  meet  the  re- 
quirements of  the  statute ;  and  it  often  happens  that  the 
court  having  jurisdiction  will  agree  with  the  principal 
and  refuse  to  compel  him  to  file  a  new  bond.  That  leaves 
the  surety  with  no  alternative  but  to  carry  the  liability 
without  compensation  or  to  sue  for  the  premium.  Some- 


124  COURT   BONDS — FIDUCIARIES. 

times  a  case  is  further  complicated  by  the  fact  that,  not- 
withstanding the  statutory*  procedure  has  not  been  fol- 
lowed, (as  where  the  court  accepts  as  satisfactory  a 
bond  filed  prior  to  the  petition),  the  court  orders  that 
the  original  surety  be  released.  It  is  then  particularly 
difficult  to  get  a  valid  release ;  for  generally  neither  the 
principal  nor  the  court  will  make  another  move  in  that 
direction. 

It  may  be  hard  for  a  layman  to  understand  that 
an  order  of  court,  directing  that  a  surety  be  released, 
is  not  valid ;  but,  where  the  statute  has  not  been  strictly 
complied  with,  the  invalidity  of  such  an  order  has  been 
declared  by  the  courts  in  too  many  cases  to  be  now  open 
to  dispute. 


CHAPTER  IV. 
COURT  BONDS— CREDIT  GUARANTEES. 

Sec.  75. — Scope.  In  the  last  chapter  we  con- 
sidered one  class  of  court  bonds,  namely,  those  of  fidu- 
ciaries, but  there  is  another  class  of  court  bonds  for 
which  surety  companies  have  many  applications.  The 
bonds  to  which  we  are  now  referring  are  given  by  liti- 
gants, and  are  generally  required  by  law  for  the  pur- 
pose of  protecting  the  adverse  party  from  loss  in  the 
event  the  principal  fails  to  make  good  his  conten- 
tion in  the  pending  suit.  This  class  includes  appeal, 
attachment,  injunction  and  replevin  bonds;  bonds  to 
dissolve  an  attachment  or  an  injunction  or  to  secure 
the  return  of  property  seized  by  writ  of  replevin ;  bonds 
to  indemnify  a  sheriff  or  a  marshal  against  loss  in 
releasing  or  seizing  property ;  bonds  of  petitioning  cred- 
itors in  a  matted  of  bankruptcy  or  receivership ;  bonds 
to  release  ships  from  seizure  in  admiralty  proceedings, 
and  some  others  which  it  is  not  important  now  to  enum- 
erate. 

Sec.  76.— The  Underwriting  of  Judical  Credit 
Guarantees.  The  several  classes  of  bonds  that  have 
heretofore  been  discussed  guarantee,  mainly,  that  the 
principal  will  not  misappropriate  the  money  or  prop- 
erty that  may;  come  into  his  hands.  The  bonds  which 
are  the  subject  of  this  chapter  are  different.  They 
guarantee,  in  effect,  that  the  principal,  if  unsuccessful 
in  the  litigation  in  which  the  bond  is  filed,  will  satisfy 
the  judgment  of  the  court.  To  do  so  usually  requires 


126  COURT  BONDS — CREDIT  GUARANTEES. 

the  payment  of  money.  Accordingly  the  surety  on  one 
of  these  bonds  guarantees  the  credit  of  the  principal,  in 
the  same  way  that  the  endorser  on  a  promissory  note 
guarantees  the  credit  of  the  maker;  that  is,  he  guar- 
antees the  ability  of  the  principal  to  pay  the  requisite 
amount  on  due  and  legal  demand — legal  demand  being 
the  judgment  or  order  of  the  court.  The  nature  or 
quality  of  the  risk  depends,  therefore,  almost  entirely 
upon  the  financial  standing  of  the  principal:  if  he  has 
the  means  to  satisfy  the  judgment,  the  surety  will  sus- 
tain no  loss;  if  he  has  not,  the  surety  will  sustain  a 
loss, — and  this  entirely  irrespective  of  the  moral  stand- 
ing of  the  principal  and  his  good  intentions. 

While  these  bonds  do  guarantee  the  payment  of 
money,  the  guarantee  is  generally  not  absolute,  that  is, 
to  pay  in  any  event,  but  only  to  pay  in  case  the  prin- 
cipal is  unsuccessful  in  the  pending  litigation.  But  it 
must  be  distinctly  borne  in  mind  at  all  times  that  it  is 
not  within  the  province  of  a  bonding  company  to  specu- 
late on  the  success  or  failure  of  an  applicant  in  a  par- 
ticular case.  There  are  always  two  opposing  litigants, 
each  of  whom  we  may  assume  thinks  he  is  right ;  the  ob- 
ject of  the  suit  being  to  determine  this  question.  There- 
fore, a  bonding  company  should  not,  under  any  circum- 
stances, no  matter  how  clear  the  applicant's  case  may 
seem,  assume  that  the  applicant;  will  win  the  case  and 
sign  the  bond  on  that  assumption.  The  liability  ought 
to  be  estimated  on  the  assumption  that  the  applicant 
will  lose  the  case.  As  already  stated,  the  premium  on 
bonds  is  merely  for  the  use  of  the  surety's  name  and 
credit.  This  is  particularly  true  with  respect  to  bonds 


COURT  BONDS — CREDIT  GUARANTEES.  127 

of  this  character ;  and  the  applicant  ought  to  be  required 
to  protect  the  surety  against  possible  loss,  either  by  the 
deposit  of  collateral  security,  or  otherwise,  to  the  satis- 
faction of  the  surety.  The  applicant  ought  to  protect 
the  surety  in  the  same  manner  and  to  the  same  extent 
as  he  would  be  required  to  protect  a  bank  from  which 
he  borrowed  an  amount  equal  to  the  estimated  liability 
on  the  bond.  And  there  is  this,  difference  between  the 
case  where  a  bank  loans  money  and  where  a  surety 
signs  a  bond  of  this  kind:  a  loan  is  made  for  a  period 
of  at  most  four  months,  and  in  many  cases  less,  while  it 
may  be  a  year  or  more  before  the  pending  litigation  in 
which  the  bond  is  filed,  will  end.  In  the  meantime,  a 
principal,  who  was  in  good  condition  financially  when 
the  bond  was  signed  and  who  may  have  remained  so 
for  a  period  of  four  months  or  more,  may  have  become 
insolvent  and  unable  to  satisfy  the  judgment.  It  is 
therefore  necessary  for  bonding  companies  to  be  even 
more  careful  than  banks,  for  the  term  of  credit  is 
longer. 

As  a  rule  collateral  security,  in  the  shape  of  cash 
or  its  equivalent  in  marketable  securities,  should  be 
required  on  all  bonds  of  this  kind,  and  it  is  not  within 
my  province  to  say  when,  if  ever,  a  man  is  sufficiently 
strong  financially  to  warrant  the  execution  of  a  bond 
of  this  kind  without  collateral,  as  different  companies 
have  different  requirements,  and  circumstances  alter 
cases.  However,  it  may  be  within  the  bounds  of  pro- 
priety to  say  that  collateral  should  not  be  waived  unless 
the  applicant  is  a  partnership  or  corporation  which 
does  not  depend  for  its  success  upon  any  one  man,  and 


128  COURT  BONDS — CREDIT  GUARANTEES. 

which  has  a  well  established  business  which  is  not  specu- 
lative in  its  nature;  unless  the  concern  is  rated  by  the 
mercantile  agencies  at  fifteen  times  the  amount  of  the 
bond  and  has  the  highest  grade  of  credit;  unless  the 
financial  statement  is  verified  to  a  reasonable  extent,1  and 
confirms  the  report  of  the  mercantile  agencies,  and  unless 
the  applicant  bears  a  first-class  reputation,  and  appears 
to  be  honestly  fighting  the  case  and  not  merely  attempt- 
ing to  postpone  payment  pending  receipt  of  funds  to 
meet  the  obligation. 

It  is  suggested  that  each  underwriter,  before  waiv- 
ing collateral  requirements,  obtain  the  express  consent 
of  his  company,  or  follow  explicitly  the  rules  laid  down 
by  it.  The  thing  to  be  made  clear  here  is,  not  so  much 
when  these  bonds  may  be  written  without  collateral,  as 
that  they  are  credit  guarantees,  and  that  the  surety 
ought  to  be  fully  protected  against  possible  loss.  While 
it  would  be  a  good  safe  rule  to  require  collateral  security 
to  the  full  amount  of  the  bond  in  all  cases  of  this  char- 
acter, it  is  well  to  bear  in  mind  that  people  generally 
get  bonds  of  this  kind  where  the  requirements  are  the 
least  burdensome,  and  therefore  sound  business  policy 
requires  all  the  liberality  that  is  consistent  with  safety. 
It  follows  that  the  underwriter  who,  in  arranging  for 
security,  most  nearly  approximates  the  actual  liability 
on  the  bond,  and  at  the  same  time  completely  protects 
his  company,  will  be  the  most  successful. 

The  general  nature  and  underlying  principles  of 
these  bonds,  and  of  the  judicial  proceedings  in  which 


iSee  Section  107. 


COURT  BONDS — CREDIT  GUARANTEES.  129 

they  may  be  required,  will  be  considered,  to  the  end 
that,  by  applying  those  principles  to  any  particular 
case,  the  extent  of  the  liability  can  be  ascertained  with 
sufficient  accuracy  to  permit  the  surety  to  make  proper 
arrangements  for  its  protection  without,  at  the  same 
time,  placing  any  unnecessary  burden  upon  the  appli- 
cant. 

Sec.  77. — Appeal  or  Supersedeas  Bonds.  The 
bond  that  is  perhaps  most  frequently  needed  in  the 
course  of  judicial  proceedings  is  the  bond  on  appeal. 
Whenever  there  is  a  judgment  or  decree  against  a  liti- 
gant, and  he  desires  to  take  the  case  to  a  higher 
court,  and,  in  the  meantime,  to  prevent  the  execution 
of  the  judgment,  it  is  necessary  to  give  an  appeal  bond, 
that  is,  a  bond  to  supersede  or  take  the  place  of  the 
judgment, — the  condition  of  which  is,  in  effect,  that  the 
principal  will  prosecute  the  appeal  without  unnecessary 
delay,  and  satisfy  the  judgment  or  decree,  with  in- 
terest and  costs,  in  case  it  be  affirmed  by  the  appellate 
court. 

When  a  surety  signs  such  a  bond,  he  undertakes  that, 
if  the  judgment  be  affirmed,  the  principal  will  do  what- 
ever the  court  has  ordered  him  to  do  or  pay  the  dam- 
ages resulting  from  his  failure  to  do  so.  The  theory 
upon  which  such  a  bond  is  required  is  that  since  the 
successful  litigant  is,  by  the  appeal,  deprived  of  his 
right  to  have  the  order  executed  at  a  time  when,  in 
theory  at  least,  it  could  have  been  executed,  he  ought, 
in  case  the  order  be  affirmed,  to  be  put  in  the  same  posi- 
tion as  if  there  had  been  no  appeal ;  or,  in  other  words, 


130  COURT  BONDS — CREDIT  GUARANTEES. 

he  ought  not  to  be  prejudiced  by  the  possible  insolvency 
of  the  principal  pending  the  appeal. 

In  the  great  majority  of  cases,  appeals  are  taken 
from  judgments  or  decrees  for  the  payment  of  money; 
and,  in  such  cases,  the  actual  liability,  in  the  event  of 
affirmance,  is  for  the  amount  of  the  judgment,  with 
interest  and  costs,  although  the  penalty  of  the  bond  is 
generally  required  by  law  to  be  double  the  amount  of 
the,  judgment.  Where  the  appeal  is  not  from  a  money 
judgment,  the  liability  will  be  for  the  actual  damages 
resulting  from  the  failure  of  the  principal  to  comply 
with  the  judgment  or  order.  If,  for  example,  the  judg- 
ment requires  the  delivery  of  property,  the  measure  of 
damages,  in  case  of  the  affirmance  of  the  judgment,  and 
the  failure  of  the  principal  to  comply  with  it,  will  be 
the  value  of  the  property,  plus  the  value  of  its  use 
pending  the  appeal,  and  costs.  In  determining  the 
probable  damages,  each  case  will  have  to  be  tested  by 
its  own  peculiar  circumstances;  but  it  is  to  be  borne 
in  mind  that,  if  the  amount  of  damages  or  liability  that 
will  accrue  upon  an  affirmance  of  the  order  cannot  be 
definitely  fixed  in  advance?  at  an  amount  less  than  the 
penalty  of  the  bond,  then  the  amount  of  the  bond  is  the 
only  safe  estimate. 

In  some  cases,  a  litigant  may,  without  taking  an 
appeal,  obtain  a  temporary  stay  of  execution  of  a  judg- 
ment against  him  by  giving  what  is  called  a  super- 
sedeas  bond  or  a  bond  to  take  the  place  of  the  judg- 
ment. The  liability  on  such  a  bond  is  the  same  as  if  an 
appeal  had  been  taken;  that  is,  the  surety  undertakes 


COURT  BONDS — CREDIT  GUARANTEES.  131 

that  the  principal  will  satisfy  the  judgment  at  the  end 
of  the  stipulated  period. 

Where  the  judgment  or  decree  does  not  order  that 
anything  be  done  by  either  party  to  the  suit,  but 
simply  denies  the  relief  asked  by  the  plaintiff  or  com- 
plainant, it  is  generally  necessary  to  give  a  bond  only 
for  the  payment  of  the  court  costs  on  the  appeal.  At 
any  rate,  that  is  generally  the  maximum  liability.1 

Sec.  78.— Bonds  for  Costs.  It  is  often  necessary, 
in  order  to  institute  a  suit,  to  give  a  bond  conditioned 
to  pay  the  court  costs,  such  as  the  fees  of  the  clerk  of 
the  court,  the  sheriff  and  the  like.  Such  bonds  do  not 
generally  exceed  $250.00,  or  at  the  most  $500.00 ;  and  it 
is  hardly  worth  while  to  try  to  estimate  the  probable 
amount  of  the  costs  where  the  penalty  of  the  bond  is  so 
small.  If  collateral  security  is  to  be  required,  it  is  gen- 
erally reasonable  to  ask  for  an  amount  equal  to  the 
penalty  of  the  bond.1 

Sec.  79. — Attachment  Bond.  Attachment  or  pro- 
visional seizure  is  a  taking  of  the  defendant's  property 
into  custody  by  the  sheriff  on  a  summary  process  from 
a  court,  in  advance  of  the  trial  of  the  merits  of  the 
case,  as  security  for  the  payment  of  any  judgment  that 
may  be  recovered.  It  is  not  an  independent  proceeding 
but  one  merely  in  aid  of  a  suit  commenced  concur- 
rently with  or  before  the  proceeding  in  attachment. 
The  remedy  is  not  available  in  all  cases,  but  only  in 
certain  special  cases  mentioned  in  the  statute;  as  for 


iAs   to   the   matter  of   protecting   the  surety   on  these  bonds,   see 
Section    76. 


132  COURT  BONDS — CREDIT  GUARANTEES. 

example,  where  the  defendant  is  a  non-resident  of  the 
State,  an  absconding  debtor,  or  a  foreign  corporation, 
or  where  he  is  about  to  dispose  of,  conceal  or  remove 
his  property  out  of  the  state  with  intent  to  defraud  his 
creditors. 

The  writ  of  attachment  will  never  be  issued  unless 
the  plaintiff  gives  a  bond  conditioned  that,  if  it  be 
finally  decided  that  the  writ  ought  not  to  have  been 
issued,  he  will  pay  any  damages  the  defendant  may  sus- 
tain as  a  result  of  the  issuance  of  the  attachment.  In 
order  to  sustain  the  attachment,  it  is  necessary  for  the 
plaintiff  not  only  to  recover  a  judgment  against  the  de- 
fendant but  also  to  show  that  at  least  one  of  the  statu- 
tory grounds  for  attachment  exists. 

The  property  is  not  delivered  to  the  plaintiff,  but 
is  held  by  the  sheriff,  so  there  is  no  liability  for  the 
return  of  the  property,  but  only  for  the  damages  that 
may  be  sustained  by  the  defendant  as  a  result  of  being 
deprived  of  the  possession  and  use  of  the  property.  The 
statutes  usually  provide  that  the  penalty  of  the  bond 
shall  be  double  the  value  of  the  property  to  be  attached, 
but  this  is  not  necessarily  a  fair  estimate  of  the  liability. 
The  two  elements  that  usually  go  to  make  up  the  dam- 
ages in  a  case  of  wrongful  attachment  are  (1)  the  value 
of  the  use  of  the  property!  for  the  time  defendant  was 
deprived  of  it, — although  real  estate  can  be  attached 
without  being  taken  out  of  the  possession  .of  the  defend- 
ant,— and  .(2)  the  depreciation,  if  any,  in  the  value  of 
the  property  as  a  result  of  the  attachment. 

The  value  of  the  use  of  the  property  is  not  difficult 


COURT  BONDS — CREDIT  GUARANTEES.  133 

to  ascertain  with  reasonable  accuracy.  If  money,  legal 
interest  is,  of  course,  the  value  of  its  use ;  "if  other  prop- 
erty, ordinarily  the  fair  rental  value  would  be  the  value 
of  its  use.  The  probable  depreciation  in  value  is  more 
difficult  to  ascertain  in  advance.  It  will  depend  upon 
the  nature  of  the  property.  Money  will,  of  course,  not 
depreciate  at  all ;  real  estate  will  ordinarily  not  actually 
depreciate,  although  the  defendant  may,  as  a  result  of 
the  attachment,  be  prevented  from  making  an  advan- 
tageous sale,  and  may  thereby  be  damaged.  But  if, 
for  example,  the  assets  of  a  running  business  are  wrong- 
fully attached,  so  that  the  business  is  stopped,  the 
resulting  loss  may  be  great ;  and  in  such  cases,  the  dam- 
ages may  equal  or  even  exceed  the  value  of  the  prop- 
erty at  the  time  of  its  attachment.1 

Sec.  80. — Bond  to  Dissolve  an  Attachment.  The 
statutes  of  the  various  states,  as  a  rule,  provide  that 
when  an  attachment  has  been  issued  and  defendant's 
property  seized,  he  may  have  the  property  returned 
to  him  by  giving  bond  with  surety  conditioned,  either 
that  he  return  the  property,  if  ordered,  or  pay  any 
judgment  that  may  be  rendered  against  him,  with  in- 
terest and  costs.  There  is  a  technical  distinction  be- 
tween these  two  kinds  of  bonds,  but,  for  the  purpose  of 
estimating  the  possible  liability,  both  may  be  considered 
together.  The  practical  effect,  in  either  case,  is  that 
the  bond  stands  in  the  place  of  the  property ;  and  while 
the  plaintiff  is  deprived  of  the  security  that  was 
afforded  by  the  property,  he  has  the  bond  in  its  place. 


iAs  to  the  matter  of  protecting  the  surety  on  these  bonds,  see  Sec- 
tion 76. 


134  COURT  BONDS — CREDIT  GUARANTEES. 

The  liability  cannot,  in  any  event,  exceed  the  amount 
recovered  by  the  plaintiff,  with  interest  and  costs;  and 
if  the  bond  is  conditioned  only  for  the  return  of  the 
property,  it  cannot  exceed  the  value  of  the  property, 
which,  of  course,  may  be  less  than  the  amount  of  the 
judgment.  The  statutes  may  provide  for  a  bond  in 
double  the  value  of  the  property,  or  in  double  the 
amount  claimed  by  the  plaintiff,  but  is  an  unneces- 
sary hardship  on  the  applicant  to  require  collateral  for 
more  than  the  actual  liability.  If  however  this  cannot 
be  definitely  fixed  at  a  sum  less  than  the  penalty  of  the 
bond,  then  of  course,  the  amount  of  the  bond  is  the 
only1  proper  estimate  of  the  liability.1 

Sec.  81. — Injunction  Bond.  An  injunction  is  a 
judicial  process  issuing  out  of  a  court  of  chancery, 
whereby  a  party  is  required  to  do  or  to  refrain  from 
doing  a  particular  thing.  The  ordinary  form  is  one 
which  operates  to  prevent  the  performance  of  an  act, 
although  the  other,  which  operates  to  require  an  act 
to  be  done,  may  be  issued.  The  latter  is  called  a  man- 
datory injunction,  and  the  former,  a  prohibitory  in- 
junction. 

As  a  condition  precedent  to  the  issuance  of  an 
injunction,  it  is  the  uniform  practice  to  require  plain- 
tiff to  give  a  bond  conditioned  that,  if  it  be  finally  de- 
cided that  the  injunction  ought  not  to  have  been 
granted,  he  will  pay  all  damages  that  may  be  sustained 
by  the  defendant  as  a  result  of  the  issuance  of  the  in- 
junction. No  useful  purpose  would  be  served  in  at- 


iAs  to  the    matter  of    protecting  the  surety    against  this  liability, 
eee  Section  76. 


COURT  BONDS — CREDIT  GUARANTEES.  135 

tempting  to  formulate  rules  for  determining,  in 
advance,  the  probable  damages  in  a  particular  case. 
The1  amount  of  the  bond  is  a  matter  within  the  discre- 
tion of  the  court,  to  be  fixed  in  each  case  according  to 
circumstances;  and  it  is  reasonable  to  assume  that  the 
court's  estimate  is  as  nearly  correct  as  is  reasonably 
possible,  and  therefore,  that  the  penalty  of  the  bond 
represents  the  probable  damages.1  While  it  is  generally 
found,  at  the  conclusion  of  the  case,  that  the  penalty 
of  the  bond  is  larger  than  the  amount  of  the  damages 
actually  sustained,  there  is  usually  no  other  basis  upon 
which  the  probable  damages  can,  with  reasonable  pru- 
dence, be  estimated. 

When  the  injunction  restrains  the  defendant  from 
collecting  a  note,  judgment  or  mortgage,  it  is  generally 
held  that  the  surety  is  absolutely  liable  under  the  bond, 
for  the  full  amount  due  on  the  debt,  the  collection  of 
which  was  enjoined;  and  this  entirely  irrespective  of 
the  actual  loss  suffered  in  consequence  of  the  delay 
caused  by  the  injunction.  The  fact  that  the  security 
for  the  debt  was  inedaquate  at  the  time  the  injunction 
was  issued  or  that  it  was  not  lessened  by  the  injunction 
or  that  the  debtor  was  wholly  or  partially  insolvent  at 
the  time  the  injunction  was  issued  makes  no  difference. 
In  such  cases  it  is  particularly  necessary  that  the  surety 
obtain  good  collateral  security  to  the  full  amount  of 
the  bond,  or  the  full  amount  of  the  debt  and  probable 
interest.1 

Sec.  82.— Bond  to  Dissolve  an  Injunction.    After 


iAs  to  the  matter  of  protecting  the  surety,  see  Section  76. 


136  COURT  BONDS — CREDIT  GUARANTEES. 

an  injunction  has  been  issued,  the  court  may,  in  its 
discretion,  dissolve  the  injunction  on  the  giving  of  a 
proper  indemnity  bond  by  the  defendant.  Such  a  bond 
would  be  conditioned,  in  effect,  to  pay  the  damage  the 
plaintiff  may  sustain  as  a  result  of  the  performance  of 
the  act  or  acts  originally  enjoined.  The  amount  of  this 
bond,  like  that  of  an  injunction  bond,  is  a  matter  within 
the  discretion  of  the  court,  and  is  fixed  in  view  of  the 
special  circumstances  of  each  particular  case.2 

Sec.  83. — Replevin  Bonds.  Replevin  is  an  action 
to  recover  the  possession  of  specific  articles  of  personal 
property,  whereby  the  articles,  are,  at  the  commencement 
of  the  suit,  seized  by  the  sheriff  and  delivered  to  the 
plaintiff.  In  such  cases,  it  is  necessary  for  the  plaintiff 
to  give  a  bond  conditioned  for  the  return  of  the  prop- 
erty, if  a  return  is  ordered,  and  for  the  payment  of  all 
costs  and  damages  adjudged  to  the  defendant.  The  law 
usually  requires  that  the  amount  of  the  bond  be  double 
the  estimated  value  of  the  property;  and  while  it  is 
desirable,  from  considerations  of  safety,  to  require  se- 
curity for  the  full  penalty  of  the  bond,  yet,  in  most 
cases,  the  actual  liability  will  not  be  so  great.  The  maxi- 
mum liability  is  for  the  value  of  the  property,  with  costs 
and  counsel  fees,  and  the  damages  suffered  by  the  de- 
fendant as  a  result  of  being  deprived  of  the  use  of  the 
property,  which  is  usually  figured  at  the  fair  rental 
value.  If  these  items  can  be  arrived  at,  with  reasonable 
definiteness,  they  will  be  a  fairly  safe  estimate  of  the 
liability. 


2See  Sections  76  and  81. 


COUET  BONDS — CREDIT  GUARANTEES.  137 

Where  the  property  is  susceptible  of  joint  control 
by  the  surety's  representative,  it  is  sometimes  feasible 
to  arrange  for  it,  so  that,  if  so  ordered,  the  actual  prop- 
erty may  be  returned,  thus  reducing,  to  that  extent, 
the  possible  liability.1 

Sec.  84. — Redelivery  Bond  In  Replevin.  In  many 
of  the  states,  the  statutes  permit  a  defendant  in  replevin, 
upon  the  execution  of  a  re-delivery  Bond,  to  retain  pos- 
session of  the  property  replevied,  pending  the  termina- 
tion of  the  replevin  action.  This  bond  is  sometimes 
called  a  retorno  habendo  bond.  The  bond  is  conditioned 
for  the  delivery  of  the  property  to  the  plaintiff,  if  or- 
dered, '  '  in  like  good  order  and  condition  as  when  taken.  ' ' 
The  bond  will  be  satisfied  by  a  return  of  the  property 
in  the  same  or  a  better,  but  not  in  a  worse,  condition, 
there  being  no  liability  for  any  costs  or  damages.1  If 
therefore  the  property  can  be  subjected  to  joint  control 
by  the  surety's  representative,  so  that  it  can  certainly 
be  returned,  there  can  be  no  loss  under  the  bond,  except 
for  any  injury  to  the  property  whereby!  it  is  put  in  a 
worse  condition. 

In  some  states,  in  order  for  the  defendant  in  replevin 
to  regain  possession  of  the  property,  it  is  necessary  for 
h'im  to  re-take  it  on  a  new  writ  of  replevin  and  to  give 
a  regular  replevin  bond.  The  liability  on  such  a  bond 
is  the  same  as  on  that  of  the  plaintiff  in  a  replevin  ac- 
tion.2 

Sec.  85.— Bond  in  Case  of  a  Distraint  for  Rent. 
Th°,  law  of  nearly  all  of  the  states  permits  the  landlord 

xAs  to  the  matter  of  protecting  the  surety,  see  Section  76. 
2See  Section  83. 


138  COURT  BONDS — CREDIT  GUARANTEES. 

of  leased  real  estate  to  cause  the  personal  property  of 
the  tenant,  found  on  the  premises,  to  be  seized  by  the 
sheriff  or  constable  as  security  for  the  payment  of  rent 
alleged  to  be  due.  Before  the  property  can  be  seized, 
or  distrained,  as  it  is  technically  called,  it  is  generally 
necessary  that  the  landlord  give  a  bond  conditioned  to 
pay  all  damages  that  may  be  sustained  in  case  it  be  fin- 
ally decided  that  the  distraint  was  unlawfully  made. 
If,  under  the  law  of  the  particular  state,  the  property 
is  to  be  sold,  or  delivered  to  the  landlord,  in  advance  of 
the  final  determination  of  the  case,  the  measure  of  lia- 
bility under  the  bond  will  be  the  value  of  the  property 
distrained,  together  with  damages  for  its  detention,  as  *ii 
the  case  of  a  replevin.1  Where  however  the  property 
is  to  be  held  by  the  sheriff  or  constable,  pending  the 
final  determination,  the  liability  will  be  only  for  the 
damages  sustained  by  the  tenant  as  a  consequence  of 
being  deprived  of  the  possession  and  use  of  the  prop- 
erty,— as  in  the  case  of  an  attachment.1 

Sec.  86.— Bond  to  Release  a  Distraint.  Where  the 
property  of  a  tenant  is  seized  for  the  payment  of  rent 
alleged  to  be  due,  and  the  tenant  desires  to  dispute  the 
landlord's  right  to  collect  the  rent,  he  may  ordinarily 
cause  the  property  to  be  returned  to  him,  upon  giving 
bond  conditioned  to  return  the  property  if  ordered  to 
do  so  by  the  court,  or  to  pay  whatever  judgment  the 
landlord  may  recover  in  the  suit.  The  liability  under 
such  a  bond  is  practically  the  same  as  under  a  bond  to 
dissolve  an  attachment.2 


iSee   Section    79.     As   to   the   matter   of   protecting   the   surety,   see 
Section  76. 

2See  Section   80 


COURT  BONDS — CREDIT  GUARANTEES.  139 

Sec.  87. — Indemnity  Bonds  to  Sheriff  or  Marshal 
In  releasing  property.  In  the  course  of  the  adminis- 
tration of  justice,  it  often  becomes  the  duty  of  a  sheriff 
or  marshal  to  take  personal  property  into  his  posses- 
sion and  hold  it  pending  the  termination  of  a  suit. 
Where  this  has  been  done,  the  court  will  sometimes 
order  the  sheriff  to  deliver  the  property  to  one  of  the 
parties  to  the  suit  upon  his  giving  to  the  sheriff  a 
bond  conditioned  for  the  return  of  the  property,  if 
ordered.  Whatever  may  be  the  penalty  of  the  bond, 
the  liability  is  for  the  value  of  the  property  not  so 
returned, — that  and  nothing  more.  The  same  thing 
would  apply  in  case  the  sheriff  voluntarily  delivered  the 
property  upon  the  giving  of  a  similar  bond  for  his  pro- 
tection. In  some  cases  all  or  a  part  of  the  property  can 
be  subjected  to  joint  control,  thus  reducing  the  chance 
of  loss  or  wiping  it  out  altogether.1 

Sec.  88. — Indemnity  Bonds  to  Sheriff  or  Marshal. 
In  seizing  property  or  making  arrest.  If  a  sheriff  or 
marshal,  in  attempting  to  execute  the  process  of  a  court, 
by  mistake,  seizes  property  which  in  fact  does  not  be- 
long to  the  defendant,  or,  in  any  other  way,  violates  his 
duty,  to  the  injury  of  an  innocent  third  person,  he  may 
incur  a  liability  for  the  damages  thereby  sustained.  It 
is  therefore  the  sheriff's  privilege,  as  a  condition  prece- 
dent to  seizing  a  particular  piece  of  property,  or  doing 
any  other  act,  at  the  request  of  a  party  to  a  suit,  to 
demand  of  him  a  bond  with  surety,  to  indemnify  him 
against  liability  or  loss.  In  each  instance,  the  sheriff 


iAs  to  the  matter  of  protecting  the  surety  in  case  full  joint  control 
cannot  be  secured,  see  Section  76. 


140  COURT  BONDS — CREDIT  GUARANTEES. 

will  fix  the  penalty  of  the  bond,  having  in  view  the  cir- 
cumstance of  the  case ;  and  it  may  be  assumed  that  the 
sheriff  is  the  best  judge  of  the  liability  he  may  incur. 
The  amount  of  the  bond  is  therefore  the  proper  esti- 
mate of  the  possible  liability.2 

Sec.  89.— Libellant's  Bond  in  Admiralty.  Where 
a  suit  is  brought  against  a  ship  in  the  District  Court 
of  the  United  States,  sitting  as  a  court  of  Admiralty, 
and  the  plaintiff  desires  to  have  the  ship  libelled,  that 
is,  taken  into  the  custody  of  the  United  States  Marshal 
and  held  as  security  for  any  judgment  that  may  be 
rendered  in  the  pending  suit,  he  may  be  required  to 
give  a  bond  to  indemnify  the  marshal  against  loss  as  a 
result  of  making  the  seizure.  This  bond  is  similar  to 
that  given  to  a  sheriff,  under  similar  conditions,1  and 
the  liability  ought  to  be  estimated  at  not  less  than  the 
full  penalty  of  the  bond.1 

Sec.  90.— Bond  to  Release  a  Libel  or  a  Stipulation 
for  Value.  Where,  in  a  proceeding  in  a  court  of  ad- 
miralty, a  ship  has  been  libelled,  the  owner  of  the  ship 
may  cause  it  to  be  released  by  giving  a  bond  condi- 
tioned to  pay  any  judgment  that  may  be  recovered  by 
the  libellant  (plaintiff)  with  interest  and  costs.  Such  a 
bond  is  commonly  called  a  ' '  stipulation  for  value. ' '  The 
penalty  of  the  bond  is  generally  fixed  by  agreement  of 
counsel,  or,  if  they  cannot  agree,  it  is  fixed  by  the  court. 
In  either  event,  it  is  fixed  with  a  view  of  the  facts  of 
the  individual  case,  so  that  the  amount  of  the  bond 
should  be  the  minimum  estimate  of  liability.  It  may  be 


iSee  preceding  Section. 

2As  to  the  matter  of  protecting  the  surety,  see  Section  76. 


COURT  BONDS — CREDIT  GUARANTEES.  141 

assumed  that  the  attorneys  and  the  judge  (who  will 
determine  the  amount  to  be  recovered,  there  being  no 
jury  in  a  court  of  admiralty)  know  as  much  about  the 
probable  recovery  as  anybody  else,  and  a  surety  com- 
pany certainly  ought  not  to  presume  to  have  greater 
knowledge.2 

Sec.  91. — Bond  of  Applicant  for  the  Appointment 
of  a  Receiver.  When  a  petition  is  filed  in  a  court  of 
chancery  for  the  appointment  of  a  receiver,  the  court 
may,  as  a  condition  precedent  to  the  granting  of  the 
petition,  exact  from  the  petitioner  a  bond  conditioned, 
in  effect,  he  will  pay  all  damages  that  may  result  from 
the  appointment  and  the  acts  of  the  receiver,  that  if  it 
be  finally  decided  that  the  receiver  should  not  have  been 
appointed.  When,  therefore,  the  appointment  is  finally 
confirmed,  liability  ends.  The  amount  of  the  bond  is  to 
be  fixed  by  the  court  in  view  of  all  the  circumstances; 
and,  inasmuch  as  an  appointment  generally  disrupts  an 
existing  concern,  destroying  or  impairing  its  credit  and 
business,  it  is  not  usually  prudent  to  estimate  the  lia- 
bility at  less  than  the  penalty  of  the  bond.1 

Sec.  92.— Bond  of  Petitioning  Creditors  in  Bank- 
ruptcy. Where  a  petition  for  an  involuntary  bank- 
ruptcy is  filed,  the  court  may,  upon  specific  proof  that 
the  alleged  bankrupt  has  committed  an  act  of  bank- 
ruptcy, and  in  order  to  preserve  the  property  from  de- 
terioration, issue  a  warrant  to  the  marshal  to  seize  and 
hold  the  property,  or  may,  upon  application  of  creditors, 
appoint  a  receiver  to  take  charge  of  the  property  until 


2As  to  the  matter  of  protecting  the  surety,  see  Section  76 


142  COURT  BONDS — CREDIT  GUARANTEES. 

the  petition  is  dismissed  or  the  trustee  has  qualified. 
Before  such  a  warrant  of  seizure  will  be  issued,  the 
petitioners  will  be  required  to  give  a  bond  conditioned 
for  the  payment  to  the  bankrupt,  of  all  costs,  expenses 
and  damages  occasioned  by  the  seizure  and  detention 
of  the  property,  in  case  the  petition  be  dismissed. 

It  is  possible  in  such  cases  to  require  the  alleged 
bankrupt  to  produce  his  books  of  account  in  court  and 
submit  himself  to  an  examination  before  the  judge ;  and 
if  the  petitioning  creditors  are  prudent,  they  will  avail 
themselves  of  this  right,  and  ask  the  appointment  of  a 
receiver  only  in  the  event  it  is  shown,  to  the  satisfaction 
of  the  court,  that  the  defendant  is  a  bankrupt.  If  this 
is  done,  there  is  small  probability  that  the  petition  will 
be  thereafter  dismissed.  On  the  other  hand,  if  the  peti- 
tioners blindly  ask  the  appointment  of  a  receiver,  the 
petition  may  be  subsequently  dismissed,  and  there  may 
be  a  liability  for  the  full  amount  of  the  bond.1  How- 
ever the  amount  of  these  bonds  is  generally  nominal, 
and  they  are  executed  by  the  companies  with  consider- 
able freedom. 

Sec.  93. — Removal  Bonds.  The  law  provides  that 
under  certain  conditions,  a  case  may  be  removed  by  the 
defendant  from  a  state  court,  in  which  it  was  brought, 
to  the  United  States  Court  for  the  proper  district.  And 
under  some  conditions  a  case  may  be  removed  from  one 
state  court  to  another  on  account  of  alleged  prejudice 
or  local  influence  in  the  place  where  it  was  originally 
brought,  or  for  other  statutory  reasons.  In  the  case  of 


iSee  Section  76. 


COURT  BONDS — CREDIT  GUARANTEES.  143 

removal  from  a  state  to  a  Federal  Court,  it  is  necessary 
for  the  defendant  to  give  a  bond  conditioned  that  he 
will  enter,  in  the  court  in  which  the  case  is  to  be  re- 
moved, on  the  first  day  of  its  next  session,  a  copy  of  the 
record  in  the  suit  and  pay  all  costs  that  may  be  awarded 
by  the  court,  if  said  court  shall  hold  that  the  suit  was 
improperly  removed.  These  bonds  are  in  the  penalty 
of  five  hundred  dollars ;  and,  inasmuch  as  the  costs  may 
be  that  much,  the  possible  liability  should  not  be  esti- 
mated at  less  than  the  penalty  of  the  bond. 

In  event  it  should  appear  to  the  satisfaction  of  the 
court  to  which  the  case  is  removed  that  the  suit  does 
not  really  and  substantially  involve  a  dispute  properly 
within  the  jurisdiction  of  the  court,  or  that  the  parties 
to  the  suit  have  been  improperly  or  collusively  joined 
for  the  purpose  of  creating  a  case  removable  under  the 
law,  the  Court  will  remand  it  to  the  court  from  which 
it  was  removed.  The  court  may  remand  the  case  when- 
ever the  want  of  jurisdiction  appears,  whether  before  or 
after  hearing  or  trial  or  even  after  judgment.  The 
bond  therefore  continues  in  force  until  the  final  termi- 
nation of  the  litigation  and  the  settlement  of  the  judg- 
ment. 

In  the  case  of  removal  from  one  state  court  to  an- 
other, a  bond  is  generally  required.  In  some  states  it  is 
conditioned  merely  to  pay  the  costs  in  event  the  re- 
moval be  found  to  be  improper;  in  other  states  it  is 
conditioned  to  pay  any  judgment  that  may  be  rendered. 
The  language  of  the  bond  and  of  the  statute  should  be 
examined.  If  it  is  merely  to  pay  the  costs,  four  or  five 


144  COURT  BONDS — CREDIT  GUARANTEES. 

hundred  dollars  would  ordinarily  represent  the  maxi- 
mum liability.  When,  however  the  bond  is  conditioned 
to  pay  the  judgment,  the  nature  of  the  case  must  be 
taken  into  consideration  and  the  amount  of  probable 
liability  determined  accordingly.  Generally,  however, 
the  amount  of  the  bond  is  the  only  safe  estimate  of 
liability,  as  the  court  will  probably  fix  the  amount  of 
the  bond  with  reference  to  the  facts  of  the  particular 
case.1 

Sec.  94. — Bond  on  Order  of  Arrest.  In  some 
states,  a  person  may,  under  certain  circumstances  and 
conditions,  be  arrested  and  held  to  answer  a  demand 
against  him  in  a  civil  action.  This  is  an  extraordinary 
remedy,  and  it  is  a  rule  of  almost  universal  applica- 
tion that  the  plaintiff  is  not  entitled  to  have  the  defend- 
ant in  a  civil  action  arrested  until  he  has  given  bond, 
with  surety,  conditioned  for  the  payment  of  the  costs 
and  damages  that  defendant  may  sustain  by  reason  of 
the  arrest,  in  case  it  be  finally  decided  that  defendant 
ought  not  have  been  arrested. 

Inasmuch  as  this  bond  covers  not  only  actual  costs 
and  expenses  resulting  from  an  improper  arrest,  but 
also  damages  for  mental  anguish  and  physical  illness; 
and  inasmuch  as  these  damages  cannot  be  estimated  in 
advance,  with  any  degree  of  definiteness,  it  would  not 
be  prudent  to  consider  the  possible  liability  as  less  than 
the  penalty  of  the  bond.1 

Sec.  95. — Bail  Bonds.  One  who  has  been  charged 
with  the  commission  of  a  crime  and  arrested,  may,  ex- 


lAs  to  the  matter  of  protecting  the  surety,  see  Section  76. 


COURT  BONDS — CREDIT  GUARANTEES.  145 

cept  in  certain  specified  cases,  have  himself  released  by 
giving  bond,  with  surety,  conditioned  to  appear,  at  the 
proper  time,  in  the  court  in  which  the  charge  is  pend- 
ing and  submit  himself  to  a  trial.  It  being  impossible 
to  estimate  in  money,  the  loss  to  the  state  from  his 
failure  to  appear,  the  rule,  in  event  he  does  so  fail,  is 
that  the  entire  penalty  of  the  bond  is  thereby  for- 
feited.1 

There  is  another  feature  about  these  bonds  that 
should  receive  particular  attention.  The  theory  upon 
which  an  accused  person  is  allowed  to  be  released  upon 
giving  bail,  is  not  that  the  crime  may  be  atoned  for 
by  the  payment  of  money  or  that  the  state  would  as 
soon  have  the  money  as  prosecute  the  accused.  It  is 
rather  that,  by  giving  bail,  a  third  person,  the  surety, 
becomes  specially  charged  with  the  duty  of  seeing  to  it 
that  the  accused  does  appear  for  trial,  and  that  the 
surety  will  perform  that  duty  rather  than  pay  the 
penalty  of  the  bond.  Carrying  out  this  theory,  it  is 
the  general  rule,  to  which  however  there  are  some  ex- 
ceptions, that  the  accused  is  not  allowed  to  put  up  cash 
himself  or  to  do  so  indirectly  by  reimbursing  the  surety. 
The  courts,  therefore,  will  not  generally  lend  their  aid 
in  enforcing  any  attempt  on  the  part  of  the  surety  to 
recover  from  the  principal  the  amount  he  has  been 
required  to  pay,  or  in  realizing  on  any  collateral 
security  he  may  hold.  In  practice,  of  course,  a  surety 
company  is  seldom,  if  ever,  willing  to  undertake  this 
personal  responsibility  at  the  risk  of  being  compelled 


iSee  Section  76. 


146  COURT  BONDS — CREDIT  GUARANTEES. 

to  pay  the  penalty  of  the  bond  without  hope  of  reim- 
bursement. It  is  important  therefore,  when  such  bonds 
are  signed,  to  obtain  collateral  security  of  such  a  nature 
as  to  be  immediately  convertible  into  money  without 
any  legal  proceeding  or  publicity.  Real  money,  which 
does  not  need  to  be  converted,  is  perhaps  the  only  satis- 
factory thing,  although  there  would  seem  to  be  no 
necessary  objection  to  such  high-grade  state,  municipal 
and  railroad  bonds  as  are  quoted  on  the  New  York 
Stock  Exchange  and  could  therefore  be  converted  with- 
out the  necessity  of  any  signature,  any  delay  or  any 
publicity.1 

In  certain  of  the  States  the  law  authorizes  a  person  accused 
of  crime  to  deposit  with  the  Clerk  of  the  Court  cash  in  lieu  of  bail ; 
and  it  has  been  held  that  it  is  not  contrary  to  the  public  policy 
of  such  a  State  for  an  accused  person  to  indemnify  the  surety  on 
his  bail  bond ;  and,  therefore,  any  deed,  mortgage,  bond  of  indem- 
nity or  other  instrument  given  for  the  protection  of  the  surety, 
whether  given  by  the  accused  or  some  other  person,  will  be  enforced. 
A  cash  deposit  in  lieu  of  bond  with  surety  is  authorized  in  the 
following  States  : 

ARKANSAS.— Kirby's  Digest,  1904,  Sec.  2179. 

CALIFORNIA.— Penal  Code,  1906,   Sec.  1295 

DISTRICT    OF    COLUMBIA.— Code,    1911,    Sec.    938. 

IDAHO. — Revised  Codes,   Sec.  8120 

INDIANA. — Burns'  Anno.  Stat,  Sec.,  2017. 

IOWA. — Code,  1897,  Sec.  5524. 

KANSAS. — General  Stat.,  1909,  Sec.  6721. 

MASSACHUSETTS. — Rev.    Laws,    1902,  Ch.  217,  Sec.  77,  p.  1832. 

MINNESOTA.— General  Stat,   1913,   Sec.   9084. 

MONTANA.— Rev.  Code,  1907,   Sec.  9461. 

NEVADA. — Rev.  Laws,  1912,  Sec.  7330. 

NEW  HAMPSHIRE.— Acts,  1903,  Ch.  28. 

NEW  YORK.— Code  Grim.  Proc.,  Sees.,  586-9. 

NORTH  CAROLINA.— May  give  mortgage  on  real  estate,  which 
266  SGem  indlcate  tne  same  policy.  Pell's  Revisal  of  1908,  Sec. 

NORTH  DAKOTA.— Rev.   Codes.   1899,   Sec.   8451. 
OREGONl — Lord's  Oregon  Laws,  Sec.  1660. 
SOUTH  CAROLINA.— Criminal  Code,  1912,  Sec    37 
SOUTH  DAKOTA.— Code  Crim.  Proc.,  Sec.  590,  p    734 
TENNESSEE.— Code,  1896,  Sec.  7131. 
WASHINGTON.— Rem.  and  Bal.  Code,  Sec.  2089. 
WISCONSIN.— Statutes,  1911,  Sec.  4816. 
WYOMING.— Comp.  Stat,  1910,  Sec.  6087. 


COURT  BONDS — CREDIT  GUARANTEES.  147 

Sec.  96.— Bond  on  Sale  of  Real  Estate  of  a  De- 
ceased Person  Before  Expiration  of  Time  for  Filing 
Claims.  Those  who  have  claims  against  the  estate 
of  a  deceased  person  are  by  law  given  a  specified  time, 
generally  about  six  months  or  a  year,  within  which  to 
present  their  claims  to  the  probate  court  for  allowance. 
Inasmuch  as  the  entire  estate  of  a  deceased  person  is 
liable  for  the  payment  of  his  debts,  it  is  apparent  that 
one  is  not  safe  in  purchasing  property  left  by  de- 
ceased persons  until  after  the  expiration  of  the  time 
within  which  claims  may  be  filed. 

It  often  happens  however  that  before  the  expira- 
tion of  that  period,  the  heirs  desire  to  sell  some  of  the 
real  estate  and  find  a  man  who  would  take  it  if  the 
title  were  clear,  but  who  is  unwilling  to  do  so  except 
upon  the  giving  of  a  bond  to  indemnify  him  against 
loss,  costs,  counsel  fees  and  expenses,  in  event  any 
creditors  of  the  estate  should  assert  their  claims  against 
the  property  in  question.  The  maximum  possible 
liability  under  such  a  bond  would;  be  the  value  of  the 
property  plus  interest,  costs,  expenses  and  counsel 
fees.1 

Inasmuch  as  the  personal  estate  must  be  exhausted 
before  the  creditors  can  take  the  real  estate,  there  may 
fte  cases  where,  on  account  of  the  large  amount  of  per- 
sonal property  left  by  the  decedent,  as  compared  with 
the  amount  of  his  known  debts,  a  surety  company  would 
be  justified  in  executing  such  a  bond  without  collateral. 
But  it  is  common  knowledge  that  in  many  cases  where 


iAs  to  the  matter  of  protecting  the  surety,  see  Section  76. 


148  COURT  BONDS — CREDIT  GUARANTEES. 

men  are  thought  to  have  left  a  large  estate  practically 
free  from  debt,  it  happens  that  a  large  number  of 
creditors  appear  and  the  estate  turns  out  to  be  in- 
solvent, or  so  nearly  so  that  it  is  necessary  for  the 
creditors  to  look  to  the  real  estate  for  payment. 

It  is  suggested  therefore  that  as  a  general  proposi- 
tion, collateral  security  should  be  required,  and  that, 
while  there  may  be  cases  where  collateral  is  not  abso- 
lutely necessary,  great  care  and  caution  should  be  ex- 
ercised and  the  condition  of  the  estate  of  the  decedent 
should  be  carefully  investigated  to  ascertain  whether 
or  not  the  personal  property  is  very  much  in  excess 
of  any  debts  that  may  possibly  arise. 

Sec.  97.— Bond  of  Legatee  to  Pay  Debts  of  Testator. 
In  some  of  the  states,  the  law  provides  that  the  legatees 
under  a  will,  immediately  upon  the  death  of  the  testa- 
tor, may  take  possession  of  the  estate  bequeathed  to 
them,  upon  the  giving  of  a  bond  conditioned  for  the 
payment  of  all  debts  to  which  the  estate  may  be  subject. 
In  that  event  it  is  not  necessary  to  probate  the  will  or 
administer  the  estate.  Such  bonds  have  generally  been 
construed  to  guarantee  the  payment  of  the  debts  of  the 
testator,  regardless  of  the  value  of  the  estate  received 
by  the  legatees.  In  other  words,  when  a  legatee,  instead 
of  going  through  the  usual  process  of  administration, 
which  would  give  him  full  protection,  elects  to  take 
immediate  possession  and  ownership  of  the  estate  and 
gives  the  required  bond,  he  and  his  surety  absolutely 
guarantee  the  payment  of  all  the  debts  against  the 
estate,  regardless  of  whether  the  estate  so  received  is 
sufficient  for  that  purpose  or  not. 


COURT  BONDS — CREDIT  GUARANTEES.  149 

The  risks  under  such  a  bond  are:-  (1)  that  the 
legatee  will  squander  or  secrete  the  estate  and  put  it 
out  of  his  power  to  pay  any  debts  that  may  arise,  and 
(2)  that,  even  if  he  retains  the  estate  to  pay  possible 
debts,  the  debts  may  exceed  the  estate,  so  that  if  he  has 
no  other  property,  the  loss  will  fall  on  the  surety,  for 
all  debts  must  be  paid. 

There  are  necessarily  few,  if  any,  cases  where  a 
surety  would  be  justified  in  assuming  that  there  are 
no  debts;  and  to  the  extent  that  there  are  debts,  the 
bond  is  a  credit  guarantee,  requiring  collateral  security.1 
In  estimating  possible  debts,  each  case  must  of  course 
depend  upon  its  own  circumstances;  but  attention  is 
directed  to  the  numerous  cases  in  which  deceased  per- 
sons are  found  to  owe  more  than  is  shown  by  their 
books;  as  for  example,  where  they  are  surety  or  en- 
dorser for  others.  The  importance  of  putting  a  very 
liberal  estimate  on  the  possible  debts  is  not  to  be  un- 
derestimated;  indeed,  it  would  seem  that  the  full  pen- 
alty of  the  bond  is  the  only  safe  estimate.  It  is  possible 
in  some  cases  to  get  joint  control  of  the  assets;  and  in 
that  event,  the  only  chance  of  loss  would  be  in  case  the 
debts  should  exceed  the  assets. 

Sec.  98. — Fiduciaries  as  Applicants  for  Bond  in 
Judicial  Proceedings.  A  fiduciary  often  desires  to  ap- 
ply for  an  attachment,  injunction,  replevin  or  other 
judicial  process,  believing  it  will  aid  him  in  the  collec- 
tion of  a  debt  due  the  estate,  or  in  the  recovery  of 
property  belonging  to  it.  In  order  to  have  the  process 


iSee  Section  76. 


150  COUKT  BONDS — CREDIT  GUARANTEES. 

issued,  he  must,  like  any  other  applicant,  give  the  usual 
bond.  The  general  rule  is  that,  if  the  fiduciary  is  prop- 
erly authorized  and  directed  to  apply  for  the  process, 
and  if  he  prosecutes  the  action  in  good  faith  and  with 
diligence,  and  does  not  exceed  the  authority  and  direc- 
tion of  the  court,  then  any  incidental  expense,  includ- 
ing any  liability  on  the  bond,  would  be  considered  an 
expense  of  administration  and  would  be  paid  before  any 
distribution  to  the  creditors  or  other  persons.  It  might 
seem  therefore  that  the  chance  of  loss  by  the  surety  on 
such  a  bond  would  be  small,  it  being  assumed  that 
nearly  all  estates  in  the  hands  of  the  fiduciaries  have 
enough  assets  to  pay  the  expenses  of  administration. 
It  has  been  found  however,  that  such  bonds  are  not 
altogether  desirable,  but  on  the  contrary  are  rather 
dangerous  risks.  The  following  dangers,  among  others, 
may  be  mentioned. 

1.  The  Court,  in  making  the  order  directing  the 
institution  of  the  proceedings,   may  be   exceeding  its 
jurisdiction;   and  the  order  may,  in  consequence,   be 
void.    This  is  likely  to  be  the  case  with  probate  courts, 
or  other  courts  with  only  limited  statutory  jurisdiction. 

2.  The  fiduciary  may  exceed  the  authority  con- 
ferred upon  him  by  the  court  having  jurisdiction,  or  he 
may  be  negligent,  or  act  in  bad  faith,  and  in  conse- 
quence, the  liability  under  the  bond  may  be  held  to  be 
a  personal  liability  which  cannot  be  enforced  against 
the  estate. 

3.  There  may  not  be  sufficient  assets  in  the  estate 
to  pay  the  expenses  of  administration,  as  those  expenses 


COURT  BONDS — CREDIT  GUARANTEES.  151 

often  exceed  the  expected  amount,  and  the  assets  often 
turn  out  to  be  less  than  was  anticipated. 

4.  It  may  be  that  the  fiduciary  not  anticipating 
any  liability  under  the  bond,  will  distribute  or  other- 
wise  dispose   of   the   assets   of  the   estate  before  the 
liability  or  the  bond  accrues. 

5.  The  fiduciary  may   squander  the  assets;   and 
even  if  he  has  a  good  surety,  a  suit  may  be  necessary, 
and  that  always  means  expense  and  possible  defeat. 

Even  if  the  fiduciary  should  deposit  with  the  surety 
enough  of  the  assets  to  cover  the  liability,  the  surety 
would  not  necessarily  be  protected.  Although  that 
would  protect  the  surety  against  an  insufficiency  of 
assets,  yet,  if  the  court,  in  making  the  order,  exceeded 
its  jurisdiction,  or  if  the  fiduciary  should  exceed  the 
authority  given  him  by  the  court,  or  if  he  should  be 
negligent  or  act  in  bad  faith,  so  that  the  liability  for 
the  wrongful  attachment  or  other  process  would  be 
held  to  be  a  personal  liability,  for  which  the  estate  is 
not  liable,  then  no  doubt  the  surety  could  be  compelled 
to  return  the  portion  of  the  assets  received  as  col- 
lateral and  would  not  be  permitted  to  use  them  in  satis- 
faction of  the  liability  under  the  bond. 

It  would  seem  therefore  that  in  order  to  make  such 
bonds  perfectly  safe,  it  would  be  necessary  to  obtain  as 
collateral  something  other  than  the  assets  of  the  estate. 
However,  where  the  court  giving  the  direction  to  insti- 
tute the  proceeding  is  a  court  of  chancery,  having  gen- 
eral jurisdiction;  where  the  order  gives  the  fiduciary 
full  authority  and  direction  to  apply  for  the  process; 


152  COURT  BONDS — CREDIT  GUARANTEES. 

and  gives  him  authority  to  do  whatever  he  may  deem 
to  be  incidentally  necessary  or  expedient;  and  author- 
izes him  to  apply  to  a  surety  company  for  the  necessary 
bond,  and  to  deposit  with  the  surety  company  a  part 
of  assets  as  collateral  security,  then  it  may  be  reason- 
ably safe  to  accept,  as  collateral,  a  part  of  the  assets  of 
the  estate. 

Sec.  99.— Municipalities  as  Applicants  for  Bond  in 
Judicial  Proceedings.  It  might  seem,  on  first  thought, 
that  appeal,  attachment,  injunction,  replevin  and  other 
court  bonds  might  be  executed  for  counties  and  cities 
without  danger  of  loss,  it  being  assumed  that  there  is 
very  little,  if  any,  possibility  that  such  a  municipality 
will  become  insolvent  and  unable  to  pay  its  debts.  It 
has  been  found,  however,  that  such  bonds  are  often 
very  undesirable  for  one  or  more  of  several  reasons. 

First,  when  the  surety  seeks  reimbursement  from 
the  municipality,  it  may  be  contended,  as  was  done  in  a 
case  in  North  Carolina,  that  the  municipality  had  no  au- 
thority to  execute  the  bond,  nor  to  execute  the  indem- 
nity bond  to  the  surety,  and  therefore  that  the  surety 
can  not  secure  reimbursement  from  the  municipality  for 
any  amount  it  may  have  paid. 

Second,  the  debt  secured  by  the  bond  may  be  such 
as  the  municipality  has  no  right  under  its  charter  to 
incur,  or  may  be  in  excess  of  the  indebtedness  which  it 
can  legally  incur. 

Third,  although  the  liability  may  be  admitted,  yet 
there  may  be  in  the  treasury  no  funds  with  which  the 
payment  can  be  made ;  and  the  surety  may  be  compelled 


COURT  BONDS — CREDIT  GUARANTEES.  153 

to  pay  the  liability  under  the  bond  and -await  the  pleas- 
are  of  the  city  officials  in  making  the  necessary  levy 
and  reimbursing  the  surety.  This  very  thing  happened 
in  the  case  of  an  appeal  bond  executed  by  a  surety 
company  for  the  city  of  Chicago;  and  the,  surety  com- 
pany had  to  wait  several  years  for  its  money  notwith- 
standing there  was  a  final  judgment  against  the  city. 
The  business,  under  those  circumstances,  was  necessarily 
unprofitable,  although  there  was  no  loss  in  the  sense  in 
which  that  term  is  ordinarily  understood.  In  a  certain 
western  town,  the  officials  refused  to  make  a  levy  for 
the  purpose  of  paying  a  debt  of  the  town,  and  even 
went  to  jail  and  served  a  term  for  contempt  of  court 
in  refusing  to  obey  the  order  of  the  court  in  a  manda- 
mus proceeding  instituted  to  compel  a  levy  and  pay- 
ment. 

In  view  of  these  facts,  it  would  seem  advisable  to   ( 

\s 

require  collateral  security  on  all  bonds  for  counties  and,/ 

municipalities;  and  furthermore,  it  ought  to  be  ascer-  dU^ 

tained  that  the  obligation  to  be  secured  by  the  bond, 

is  one  which  the  municipality  has  a  legal  right  to  incur,  , 

and  that  the  funds  or  securities  put  up  as  collateral  had  j   . 

been  prop-erly  appropriated  to  that  purpose ;  otherwise      *  , 

X'V*^vUV/tv    /^"t 

the  surety  may  be  compelled  to  return  the  collateral     / 

f 

without  being  able  to  reimburse  itself. 


CHAPTER  V. 
CONTRACT  BONDS. 

Sec.  100. — Scope.  Nowadays  nearly  all  contract- 
ors are  required  to  give  bond  with  corporate  surety 
for  the  faithful  performance  of  their  contracts;  and 
those  bonds  form  one  of  the  largest,  and  at  the  same 
time,  one  of  the  most  hazardous  classes  handled  by  surety 
companies.  Bonds  may  be  required  for  the  perform- 
ance of  any  kind  of  contract,  and  all  such  bonds  are 
within  the  scope  of  this  chapter,  yet  bonds  for  building 
or  construction  contracts  are  the  kind  most  frequently 
needed,  and  with  which  we  are  principally  concerned. 

In  connection  with  a  contract,  three  different  bonds 
may  be  required,  namely:  the  preliminary  or  bid  bond 
which  guarantees  that  if  the  contract  is  awarded  to  the 
principal,  he  will  sign  the  contract  and  give  bond  for 
its  faithful  performance;  the  construction  bond,  which 
guarantees  performance  of  the  contract;  and  the  main- 
tenance bond,  which  guarantees  the  durability  or  effi- 
ciency of  the  work.  In  some  cases,  a  separate  bond  to 
guarantee  the  payment  of  bills  for  labor  and  materials 
is  required;  but  that  liability  is  generally  covered  by 
the  construction  bond  and  will  be  discussed  under  that 
head. 

Sec.  101.— The  Underwriting  of  Bid  Bonds.  In 
case  the  principal  in  a  preliminary  or  bid  bond  should 
fail  to  comply  with  the  condition  of  the  bond,  the  owner 
will  award  the  contract  to  the  next  higher  responsible 
bidder,  or  if  there  is  none  such,  will  re-advertise  the 


CONTRACT   BONDS.  155 

contract.  The  maximum  actual  liability  therefore  will 
be  the  difference  between  the  bid  of  the  principal  and 
that  of  the  lowest  acceptable  bidder  other  than  the  prin- 
cipal; but  in  order  that  application  for  these  bonds 
may  be  acceptable,  it  is  not  enough  that  the  applicant 
has  sufficient  resources  to  stand  this  difference.  It  is 
considered  bad  policy  for  a  surety  company  to  sign 
the  bid  bond  unless  it  is  also  willing  to  sign  the  con- 
struction bond.  The  premium  is  nominal,  so  that  noth- 
ing would  be  gained  and  much  might  be  lost.  And  it 
is  also  bad  policy  to  issue  the  bid  bond  on  the  assumption 
that  an  investigation  to  be  made  thereafter  will  prove 
satisfactory,  as  the  surety  may  find  itself  practically 
compelled  to  sign  a  bond  for  an  unsatisfactory  con- 
tractor. As  a  rule  therefore,  preliminary  or  bid  bonds 
should  be  issued  only  where  the  company  is  willing  to 
sign  the  construction  bond  in  case  the  contract  should 
be  awarded  to  the  principal. 

Sec.  102. — The  Underwriting  of  Construction 
Bonds.  We  now  come  to  the  consideration  of  what 
is  ordinarily  termed  a  contract  bond,  viz:  the  bond 
guaranteeing  the  performance  by  the  principal  of  the 
terms  of  a  contract  for  the  construction  of  a  building 
or  other  work.  In  considering  the  underwriting  of 
such  bonds,  we  will  follow  the  plan  that  has  already 
been  adopted  of  treating  the  subject  from  the  two 
standpoints  of  the  personality  of  the  contractor  and 
the  character  of  the  contract. 

Sec.  103.— The  Personality  of  the  Contractor.  In 
general.  A  contract  bond  is  broader  than  a  fidelity 


156  CONTRACT   BONDS. 

bond.  The  latter  is  of  a  negative  nature,  guaranteeing 
merely  that  the  principal  will  not  commit  certain  speci- 
fied acts.  The  former,  on  the  other  hand,  is  positive, 
guaranteeing  that  the  principal  will  perform  his  con- 
tract. If  an  employee  is  honest,  it  is  practically  certain 
that  his  surety  will  not  suffer  a  loss;  but  a  contractor 
may  be  perfectly  honest,  yet  may  be  deficient  in  ability, 
experience  or  financial  resources  to  carry  out  the  par- 
ticular contract;  and  therefore,  his  surety  may  suffer  a 
loss,  notwithstanding  his  honesty.  It  is  necessary  there- 
fore to  consider  the  personality  of  the  contractor  from 
the  following  standpoints:  his  personal  honesty  and 
good  intentions;  his  ability  and  experience  to  do  the 
particular  work ;  his  plant  and  equipment ;  his  financial 
resources ;  and  the  amount  of  work  he  has  on  hand. 

Sec.  104. — Honesty  and  Good  Intentions.  It  is  not 
necessary  or  practicable  to  investigate  the  matter  of  the 
personal  honesty  of  a  contractor  with  the  same  scrupu- 
lous care  that  an  applicant  for  a  fidelity  bond  should 
be  investigated.  It  is  however  necessary  to  be  satisfied 
that  he  is  a,  l>ona  fide  contractor,  who  intends  to  carry 
out  his  contract  to  the  limit  of  his  ability  and  resources ; 
that  he  is  a  man  of  reasonably  good  personal  habits,  and 
particularly  that  he  does  not  drink  to  excess;  that  he 
has  been  in  the  habit  of  performing  his  contracts  satis- 
factorily, and  paying  his  bills  promptly,  and  that  he 
bears  a  good  reputation  for  honesty  and  integrity  in  the 
community  in  which  he  lives  and  with  those  for  whom 
he  has  done  work.  And  the  importance  of  ascertaining 
these  matters  is  not  to  be  underestimated.  Contract 


CONTRACT   BONDS.  157 

bonds  are  very  hazardous  and  contractors  should  be 
carefully  investigated  from  every  standpoint.  In  this 
connection  it  is  to  be  borne  in  mind  that  the  state- 
ments of  the  men  from  whom  the  contractor  has  been 
purchasing  his  material  and  supplies  are  not  always 
reliable.  It  has  been  found  that  when  a  contractor  is 
heavily  indebted  to  a  dealer,  the  latter  will  often  recom- 
mend him  in  order  that  the  contractor  may,  out  of  the 
proceeds  from  the  new  contract,  collect  the  amount  due 
him.  Before  relying  upon  a  reference  from  a  dealer, 
it  ought  to  be  ascertained  that  the  contractor  does  not 
owe  him  an  excessive  amount,  and  that  the  bill  is  not 
overdue.  Architects,  engineers  and  owners  for  whom 
the  contractor  has  done  work  in  the  past  can  give  the 
most  reliable  information,  and  whenever  possible  they 
should  be  consulted. 

.  Sec.  105. — Ability  and  Experience.  There  is  such 
keen  competition  among  contractors,  and  the  successful 
ones  work  with  such  facility  and  economy,  that  there  is 
little  chance  for  the  man  who  is  not  up  to  standard  in 
ability  and  experience.  A  contractor  must  be  able,  not 
only  to  perform  the  work  successfully  but  to  estimate 
the  cost  accurately.  If  an  inexperienced  contractor 
meets  competition  in  bidding,  he  will  either  make  little, 
if  any,  profit,  or  will  sustain  a  loss;  and  the  surety  for 
such  a  contractor  is  in  constant  danger  of  loss,  even 
though  the  principal  may  seem  to  have  ample  financial 
resources. 

In  the  first  place,  there  is  the  man  who  has  really 
no  experience  as  a  builder,  but  who,  as  a  carpenter  or 


158  CONTRACT    BONDS. 

sub-contractor,  has  acquired  a  few  hundred,  or  perhaps 
a  few  thousand  dollars  of  capital,  and  with  that  and  a 
lot  of  nerve,  sets  himself  up  as  a  "  contractor  and  build- 
er," or  as  a  "general  contractor."  He  will  usually  be 
satisfied  to  take  contracts  for  ordinary  residences,  where 
he  thinks  no  especial  skill  or  experience  is  required; 
but  having  no  reputation  as  a  builder,  he  can  get  work 
only  in  competition  with  experienced  contractors.  In 
such  cases,  where  bids  are  asked  indiscriminately,  com- 
petition is  usually  keen;  and,  in  order  for  him  to  get 
the  contract  he  must  make  a  very  low  bid,  and  will 
therefore  have  to  do  the  work  economically.  If  there- 
fore, the  particular  contractor  has  not  the  experience 
and  ability  necessary  for  the  most  economical  work,  he 
will  not  make  a  profit  and  may  sustain  a  loss.  When 
such:  a  "contractor  and  builder"  takes  a  contract,  and 
before  it  is  completed,  gets  others,  he  is  apt  to  become  so 
involved  in  debt  that  he  cannot  extricate  himself,  with 
the  result  that  the  loss  falls  on  the  surety.  There  are 
in  fact  many  such  cases  among  the  records  of  surety 
companies  and  it  has  been  found  that  the  percentage  of 
losses  on  account  of  these  contractors  is  very  large. 
Lack  of  experience  and  ability  is  generally  shown  in  one 
or  more  of  the  following  particulars : 

1.  He  is  likely  to  underestimate  the  overhead  and 
incidental  expense  necessary  in  carrying  on  business 
operations.  He  generally  gets  bids  on  the  several  por- 
tions of  the  work,  takes  the  lowest  bid  on  each  portion, 
adds  them  together  and  considers  that  the  cost  of  the 
building.  He  allows  nothing  for  the  contingency  that 


CONTRACT   BONDS.  159 

the  low  bidder,  who  in  all  probability  has  no  finan- 
cial responsibility,  may  not  complete  the  work  at  the 
figure  for  which  he  bid;  and  allows  nothing  for  the 
many  other  contingencies  that  may  arise  and  make  the 
work  more  expensive  than  he  has  calculated. 

2.  He  will  figure  very  close  on  certain  portions  of 
the  work  because  he  thinks  he  can  do  some  of  it  himself 
and  thereby  save  expense. 

3.  Mistakes  in  estimates  are  apt  to  occur  because, 
while  large  contractors  have  their  figures  checked  by 
two  or  three  different  men,  the  small  contractor  relies 
solely  on  his  own  calculation. 

4.  It  is  seldom  that  such  a  man  manages  the  work 
in  an  efficient  manner.     It   really  takes   considerable 
executive  ability  to  carry  out  in  an  economical  manner 
even  a  small  contract ;  and  there  are  few  of  these  small 
contractors  who  have  that  particular  kind  of  ability, 
which  can  be  acquired  only  by  experience.     They  are 
likely  to  make  costly  mistakes  and  their  men  do  not 
always  work  to  the  best  advantage. 

5.  Many  of  these  small  contractors  know  absolutely 
nothing  about  bookkeeping  and  often  keep  no  books  at 
all.    The  result  is  that  they  cannot  tell  whether  the  work 
is  profitable  or  how  they  stand  financially.    They  simply 
go  ahead  with  contract  after  contract,  using  the  money 
from  one  to  pay  bills  on  the  others,  until  finally  they 
are  forced  into  bankruptcy. 

The  only  solution  of  the  problem  of  these  ineffi- 
cient contractors  is  for  the  surety  companies  to  decline 
to  bond  them ;  but  it  seems  possible,  with  the  large  num- 


160  CONTRACT   BONDS. 

ber  of  surety  companies  and  all  the  agents  competing 
for  business,  for  almost  anybody  who  calls  himself  a 
contractor  to  get  a  bond.  There  are  other  dangers  in- 
cident to  bonding  these  small  contractors,  and  those 
dangers  will  be  referred  to  in  the  proper  places. 

Lack  of  experience  has  also  been  noted  in  large 
contractors  who  undertake  lines  of  work  with  which 
they  are  not  familiar.  There  are  specialists  in  the  con- 
tracting business  as  there  are  in  other  lines  of  business 
and  the  professions ;  and,  though  a  man  may  have  ample 
experience  in  one  branch,  he  is  not  necessarily  qualified 
in  others.  And,  if  a  man  who  is  not  experienced  in  a 
particular  branch  undertakes  to  compete  with  those 
who  are,  the  result  is  likely  to  be  disastrous  to  his  surety 
as  well  as  to  himself.  A  man  may,  for  example,  be  a 
good  builder  of  ordinary  frame  or  brick  houses,  yet  not 
competent  to  build  a  monolithic  concrete  residence  or  a 
warehouse  with  reinforced  concrete  frame;  or  he  may 
be  competent  to  build  almost  any  kind  of  house,  yet 
not  be  competent  to  build  a  railroad  or  a  sewerage  sys- 
tem. It  is  important,  therefore,  to  ascertain  that  an 
applicant  for  a  contract  bond  is  qualified  by  experience 
and  ability  to  do  the  particular  work  in  hand  and  to 
estimate  accurately  the  cost.  Inquiry  ought  to  be  made 
of  architects,  engineers  and  owners  for  whom  he  has 
done  work  similar  to  that  in  question,  and  unless  their 
opinion  is  favorable,  the  business  is  generally  undesir- 
able. If  he  has  not  had  experience  in  similar  work, 
then  he  should  not  be  bonded  unless  he  has  ample 
financial  resources  to  pay  for  his  mistakes.  Attention 


CONTRACT   BONDS.  161 

is  directed  to  the  difficulties  not  only  of  doing,  but  of 
accurately  estimating  the  cost  of  certain  classes  of  work ; 
as  for  example,  the  building  of  sewers,  subways,  tunnels, 
waterworks  and  dams,  and  dredging,  where  unforeseen 
difficulties,  making  the  work  extra-expensive,  are  likely 
to  be  encountered.1 

Sec.  106. — Plant  and  Equipment.  In  order  that 
a  contractor,  may  successfully  perform  his  contracts,  it 
is  necessary  that  he  should  have  the  teams,  machinery, 
tools  and  other  equipment  necessary  for  economical 

work.    It  is  important  to!  ascertain  that  the  equipment 

,  ,.  ,         ,_         .  ,          , 

is  modern  and  in  good  condition;  for  many  losses  have 

been  caused  by  the  fact  that  the  jobs  have  been  sta 
with  worn-out  or  inefficient  machinery  or  equipment, 
necessitating  much  delay  and  expense  for  repairs  and 
oftentimes  the  purchasing  or  hiring  of  other  machinery 
before  the  completion  of  the  work.  Where  the  work 
is  at  all  difficult  or  requires  the  use  of  much  machinery, 
the  contractor  ought  to  be  required  to  give  a  detailed 
description  of  his  plant  so  that  it  may  be  submitted  to 
the  company's  engineer  for  approval.  The  engineer 
having  the  work  in  charge  generally  makes  himself 
familiar  with  this  matter  and  can  give  valuable  informa- 
tion. So  also  can  engineers  for  whom  the  contractor 
has  done  similar  work. 

The  foregoing  remarks  apply  more  particularly  to 
large  contractors  doing  difficult  work,  but  it  is  also 
necessary  for  small  contractors  to  have  a  plant.  Any 
contractor  worthy  the  name  ought  to  have  not  only  the 


iSee  Section  107,  third  paragraph. 


162  CONTRACT    BONDS. 

usual  teams  and  tools,  but  he  ought  also  to  have  an 
office  with  a  good  stenographer  and  bookkeeper.  The 
contractor  who  transacts  his  business  on  the  street  and 
keeps  his  accounts  in  his  head,  does  not  deserve  to  get  a 
bond ;  yet,  there  are  many  such  contractors  who  seem  to 
be  able  to  get  bonds  without  much  difficulty.  It  is  of 
prime  importance  that  a  contractor  should  be  able  to 
tell  exactly  whether  his  work  is  profitable  and  what  his 
financial  condition  is  at  any  particular  time;  and  if  he 
cannot  do  this  he  is  not  a  safe  man  to  bond.  In  general, 
it  may  be  said  that  the  man  who  has  not  an  office,  with 
a  complete  set  of  books  and  somebody  to  keep  them, 
should  be  let  alone  by  the  bonding  companies. 

Sec.  107. — Financial  Resources.  We  come  now  to 
what  is  perhaps  the  most  vital  element  in  the  making 
of  an  acceptable  contractor.  A  man  may  be  honest  and 
he  may  have  sufficient  ability,  experience  and  equip- 
ment to  do  a  particular  work  but  if  he  has  not  suffi- 
cient money  to  provide  the  necessary  labor  and 
materials  and  to  take  care  of  a  possible  loss  of  reason- 
able amount,  he  is  not  a  desirable  risk. 

It  is  not  possible  to  make  a  rule,  applicable  to  all 
cases,  as  to  the  amount  of  money  a  contractor  ought  to 
have  to  justify  a  surety  company  in  signing  his  bond. 
That  will  depend  upon  a  consideration  of  all  the  other 
elements  that  go  to  make  a  contractor.  But  experience 
has  shown  that,  even  if  a  contractor  is  a  desirable  risk 
in  other  respects,  he  ought  to  have  on  hand,  in  money 
or  in  good  assets  on  which  money  can  be  immediately 
realized,  an  absolute  minimum  of  fifteen  per  cent,  of  the 


CONTRACT   BONDS. 


163 


Ofo 


&(JL 

/ 


total  amount  of  all  his  contracts.1  And  it  is  only  with 
the  highest  grade  of  contractors  that  such  a  small 
amount  is  permissible;  eighteen  or  twenty  per  cent. 
would  perhaps  be  a  better  average  minimum;  and  in 
many  cases,  a  larger  amount  will  be  necessary  to  make 
up  for  the  deficiencies  in  other  respects.  This  minimum 
is  necessary  not  only  to  finance  the  work  but  to  take 
care  of  the  ever-present  danger  that  the  work  will  cost 
more  than  the  contract  price;  and  therefore  the  mini- 
mum ought  to  be  had  after  all  necessary  equipment  has 
been  provided  and  paid  for,  —  unless,  of  course,  the  cost 
of  the  equipment  has  been  figured  in  the  estimate. 

In  cases  of  contracts  for  sewers,  subways,  tunnels, 
waterworks,   dams,   dredging  and  the  like,  where  the   /  / 
work  is   in  its  nature   essentially  hazardous,   that   is/ 
where  unforeseen  difficulties,  making  the  work  extra  !  **** 
expensive,  are  likely  to  arise,  it  is  especially  necessary 
that  the  contractor  have  ample  financial  resources.    In 
such  cases,,  it  is  suggested  that  the  contractor  ought  to 
have  financial  resources  equal  to  at  least  20%  of  the 
contract  price. 

The  difficulty,  however,  is  not  to  determine  what 
financial  resources  a  contractor  ought  to  have,  but  to 
determine  what  assets  he  has  and  what  those  assets  are 
worth  as  financial  resources  ;  that  is  to  say,  what  amount 
of  money  can  be  realized  on  them  to  carry  on  the  work 
and  to  take  care  of  the  loss. 

A  contractor's  assets  generally  consist  of  cash, 
stocks  and  bonds,  real  estate,  equipment,  supplies  and 


'vn^ 


iSee  Section  108. 


164  CONTRACT   BONDS. 

accounts  receivable.  In  order  that  it  may  be  determined 
that  an  applicant  has  what  he  says  he  has,  he  ought  in 
the  first  place  to  be  required  to  sign  a  letter  addressed 
to  the  bank  in  which  the  cash  is  supposed  to  be  de- 
posited, requesting  the  bank  to  give  the  company  full 
information  concerning  the  state  of  the  applicant's  ac- 
count and  of  his  dealings  with  the  bank.  Then  the  surety 's 
representative  ought  to  talk  with  the  officials  of  the 
bank  and  ascertain  not  only  that  the  applicant  has  in 
the  bank  what  he  says  he  has,  but  also,  his  average 
balance  and  his  standing  at  the  bank,  particularly  his 
ability  to  borrow  from  the  bank.  Money  that  is  not 
in  a  bank  but  supposed  to  be  at  the  home  of  the  appli- 
cant is  usually  imaginary,  and  should  not  be  con- 
sidered. 

The  stocks  and  bonds  ought  to  be  exhibited  to  the 
surety's  representative,  and  wherever  practicable,  they 
ought  to  be  deposited  in  a  safe  deposit  box  subject  to  the 
joint  control  of  the  surety  so  that  they  may  be  used  for 
the  purpose  of  carrying  out  the  contracts  and  for  no 
other  purpose. 

It  may  be  difficult  or  troublesome  to  verify  the 
ownership  of  real  estate,  but  it  is  not  impossible,  and 
inasmuch  as  surety  companies  have  so  often  been  de- 
ceived by  false  statements  as  to  the  ownership  of  real 
estate,  the  matter  should  not  be  neglected.  The  first 
thing  is  to  require  the  applicant  to  give  the  exact  loca- 
tion of  the  property,  and  to  state  when  and  from  whom 
it  was  purchased,  or  how  it  was  acquired.  It  will  then 
be  an  easy  matter  to  go  to  the  land  records,  examine  the 


CONTRACT  BONDS.  165 

indexes  and  see  if  the  supposed  deeds,  are  on  record 
and  if  the  property  stands  in  the  name  of  the  appli- 
cant. If  it  is  found  that  the  property  has  been  con- 
veyed to  him,  then  the  indexes  should  be  followed  down 
to  date  to  see  if  he  has  disposed  of  it  or  mortgaged  it. 
It  does  not  take  a  lawyer  to  do  this.  A  few  inquiries 
from  the  recorder,  or  one  of  his  clerks,  will  enable  the 
average  man  to  follow  the  above  suggestions;  and,  if 
followed,  they  will  be  found  to  be  of  the  greatest  service 
in  discovering  those  who  are  attempting  to  deceive  the 
company  and  get  bonds  to  which  they  are  not  entitled. 
If  the  property  is  supposed  to  have  been  acquired  by 
inheritance,  a  few  inquiries  at  the  office  of  the  clerk  of 
the  Probate  Court  will  generally  bring  to  light  a 
of  the  real  estate  of  decedent  as  well  as  the  names  of 
his  heirs.  If  in  fact  the  property  was  thus  acquired,  ff 
the  land  records  should  be  examined  for  conveyances 
and  mortgages  by  the  applicant.  It  is  at  least  possible 
to  examine  the  tax  assessment  roll,  and  if  the  property 
does  not  appear  to  be  assessed  to  the  applicant,  an  ex- 
planation should  be  required. 

As  far  as  the  accounts  receivable  are  concerned,  the 
applicant  should  be  required  to  give  a  list  of  them,  with 
the  persons  or  corporations  from  whom  they  are  due,  and 
give  such  other  information  as  will  enable  the  surety's 
representative  to  ascertain  all  the  facts  with  regard  to 
them ;  and  this  information  should  be  obtained. 

Where  the  applicant  keeps  a  good  set  of  books  and 
there  is  no  evidence  that  they  have  been  falsified,  con- 
siderable dependence  can  be  put  in  them;  and,  where- 


166  CONTRACT   BONDS. 

ever  practicable,  they  should  be  examined.  On  the 
other  hand,  where  the  applicant  keeps  no  books,  or 
keeps  an  imperfect  set  and  makes  up  his  financial  state- 
ment from  memory,  it  is  strictly  important  to  verify 
each  item.  A  detailed  report  from  the  mercantile 
agencies  should,  of  course,  be  obtained.  They  are  fairly 
reliable,  but  surety  companies  have  so  often  been 
deceived  by  inflated  financial  statements  that  further 
investigation  along  the  lines  above  indicated  is  deemed 
necessary. 

Having  ascertained  that  the  applicant  has  all  the 
assets  shown  in  his  financial  statement,  it  is  next  in 
order  to  give  them  their  proper  value.  It  is  to  be  borne 
in  mind  that  we  are  now  considering  a  contractor  from 
the  standpoint  of  his  ability  to  carry  on  the  work  and 
to  take  care  of  a  possible  loss;i  and  it  follows  that  the 
assets  can  be  considered  as  valuable  only  to  the  extent 
that  they  can  be  converted  into  cash,  either  by  sale  or 
pledge,  and  to  the  extent  that  they  can  be  applied  to  the 
liquidation  of  any  liability  under  the  bond. 

The  stocks  and  bonds  should,  therefore,  be  rated 
at  their  actual  market  value.  If  they  are  not  quoted 
on  the  stock  exchange,  due  allowance  should  be  made 
for  the  probable  .difficulties  in  finding  a  purchaser  at 
what  might  be  considered  their  fair  value,  based  upon 
income. 

The  real  estate  should  be  rated  at  its  probable  value 
at  a  forced  sale.  If  it  is  improved  city  property  in  a 
good  location,  it  would  probably  bring  at  forced  sale 
about  10%  of  what  might  be  considered  its  actual  value 


CONTRACT   BONDS.  167 

based  upon  cost.  If  it  is  country  property  or  unim- 
proved property,  whether  in  the  city  or  country,  it 
would  probably  not  bring  more  than  50%  or  60%  of 
its  value.  The  amount  of  any  mortgages  or  incum- 
brances  should  be  deducted  from  that  valuation.  In- 
deed, if  property  is  mortgaged  for  a  substantial  sum — 
as  much  as  50%  of  its  supposed  value — it  is  of  little 
or  no  practical  value  in  case  of  a  default,  and  should  not 
be  considered  an  asset.  Where  the  property  is  exempt 
from  execution  as  a  homestead,  or  where  it  stands  in  the 
name  of  the  applicant's  wife,  or  in  the  joint  names  of 
himself  and  wife,  so  that  it  is  not  subject  to  execution  , 
for  his  debts,  it  should  likewise  not  be  considered  i 
asset.  It  is  generally  difficult  to  verify  the  ownership 
or  value  of  country  property;  and  unless  there  is  defi- 
nite and  satisfactory  information  on  both  of  these 
points,  it  is  generally  wise  to  ignore  such  property,  espe- 
cially if  it  is  far  from  the  home  of  the  applicant  and  un- 
improved. 

The  equipment  may  be  very  useful  and  necessary 
in  carrying  on  the  work,  but  generally  represents  little, 
if  any,  borrowing  power  and  can  be  sold  only  at  a  very 
liberal  discount.  Due  allowance,  considering  the  age 
and  usefulness  of  the  equipment,  should  be  made. 
Equipment  of  this  kind  can  seldom  be  sold  for  more 
than  half  its  cost,  and  often  not  for  that. 

The  accounts  receivable  ought  to  be  separated  into 
two  classes:  those  actually  due  and  receivable  at  the 
time,  and  those  to  become  due  in  the  future.  If  the 
former  are  due  from  responsible  parties  they  may  be 


168  CONTRACT    BONDS. 

taken  for  their  face  value,  or  say  90%  of  face  value. 
In  investigating  the  latter  class,  it  will  often  be  found 
that  the  amount  is  disputed,  or  that  it  is  necessary  for 
the  contractor  to  do  certain  work,  or  to  wait  a  con- 
siderable time  before  he  can  get  the  money.  All  such 
matters  affect  materially  the  usefulness  of  the  accounts 
for  the  purposes  of  the  contract  and  due  allowance 
should  be  made.  If  there  is  a  dispute  as  to  whether  or 
not  the  money  is  owed,  or  if  the  parties  who  owe  the 
accounts  are  not  financially  responsible  or  if  payment 
will  be  deferred  for  a  long  time,  or  if  there  is  any  other 
thing  that  may  prevent  the  contractor  from  receiving 
the  money  promptly,  the  items  should  be  eliminated. 

In  this  connection  attention  is  directed  to  the  im- 
portance of  having  the  financial  statement  made  up  at 
a  time  when  the  contractor  has  little  or  no  work  on 
hand,  as  otherwise  it  may  not  reveal  his  true  condition. 
If  he  has  other  contracts  on  hand,  his  statement  will  not 
necessarily  show  his  true  condition;  for  while  his  cash 
and  accounts  receivable  may,  at  a  particular  time,  be  in 
excess  of  his  accounts  then  actually  due  and  payable, 
he  may  nevertheless  have  a  large  volume  of  outstanding 
bills  not  yet  due,  and  in  fact,  may  not  be  able  to  com- 
plete the  pending  work  for  the  contract  price,  and  may 
therefore  be  behind  when  he  seems  to  be  ahead.  It 
has  often  been  found  that  a  contractor,  realizing  that 
he  will  sustain  a  loss  on  a  particular  contract,  will  make 
a  special  effort  to  obtain  other  work  in  the  same  neigh- 
borhood in  the  hope  of  recouping  his  loss,  or  at  least 
deferring  his  failure  in  the  hope  of  future  profits.  And 


CONTRACT   BONDS.  169 

it  has  been  found  that  although  he  made  an  accurate 
statement  of  his  accounts  receivable  and  accounts  actu- 
ally due  and  payable,  and  that,  although  his  statement 
showed  him  to  have  ample  resources,  yet  as  a  matter  of 
fact,  he  was  then  practically  insolvent. 

While  it  is  necessary -to  have  a  correct  statement 
of  accounts  actually  due  to  the  contractor  and  of  those 
due  by  him  in  order  to  determine  his  available  cash 
resources;  yet  it  is  necessary,  in  order  to  determine  his 
real  financial  condition,  to  ascertain  whether  the  balance 
to  be  received  from  the  pending  contracts,  plus  cash  on 
hand,  will  be  sufficient  to  complete  the  contracts  and 
pay  all  outstanding  bills,  whether  they  happen  to  be 
then  due  or  not,  and  leave  a  surplus.  It  is  really  only 
the  surplus  that  constitutes  the  worth  of  the  contractor. 
And  inasmuch  as  estimation  is  necessary  to  arrive  at  a 
conclusion,  a  liberal  allowance  should  be  made  for  con- 
tingencies. It  is  a  good  idea  never  to  allow  a  sup- 
posed profit  on  a  contract  to  increase  the  contractor's 
assets.  Investigation  in  this  direction  is  to  be  made  to 
see  if  his  statement  of  current  assets  is  to  be  decreased. 

It  is  hardly  necessary  to  add  that  the  liabilities  of 
a  contractor  should  be  carefully  considered;  as  they 
often  indicate  the  weakness  of  his  financial  condition 
when  it  might  otherwise  seem  to  be  good.  One  of  the 
things  especially  to  be  borne  in  mind,  is  to  see  that  he 
has  ample  resources  in  the  shape  of  cash  or  good  ac- 
counts receivable  to  take  care  of  current  liabilities, 
whether  for  borrowed  money  or  for  goods  purchased. 
In  other  words,  available  quick  assets  must  exceed  cur- 


170 


CONTRACT   BONDS. 


rent  liabilities,  regardless  of  the  value  of  real  estate 
and  other  slow  assets.  In  general  it  may  be  said  that 
when  a  contractor  has  a  large  proportion  of  bills  pay- 
able and  accounts  payable,  it  is  a  sign  that  he  may  be 
doing  too  much  work  for  his  resources,  and  that  he  c 
should  be  carefully  investigated.  The  fact  that  he  has 
put  a  mortgage  on  his  real  state  may  be  a  sign  that  his 
borrowing  capacity  is  limited;  and  if  he  has  been  com- 
pelled to  put  a  chattel  mortgage  on  his  equipment,  it  is 
generally  a  sign  that  he  is  pretty  weak,  and  that  it  were 
better  not  to  bond  him. 

In  suggesting  that  financial  statements  of  contrac- 
tors be  verified,  I  am  not  unmindful  of  the  possibility 
that  the  applicant  will  resent  a  suggestion  that  it  is 
deemed  necessary  to  verify  his  statement.  There  may 
be  some  perfectly  honest  men  who  would  resent  such  a 
suggestion,  as  an  aspersion  upon  their  integrity;  but 
generally  only  those  who  have  made  false  statements 
are  fearful  of  such  an  investigation.  The  experience  of 
the  companies  is  that  where  the  statements  are  not  veri- 
fied, the  assets  often  prove,  in  event  of  default  by  the 
contractor,  to  be  fictitious.  One  company  reports  that, 
in  making  a  partial  examination  into  the  causes  of  its 
losses  during  the  year  1912,  it  found  a  loss  of  more  than 
$37,000.00  directly  attributable  to  false  financial  state- 
ments of  principals.  The  president  of  this  company 
says,  "False  financial  statements  still  rob  our  treasury 
of  enormous  sums. ' '  The  rule  ought  to  be,  and  no  doubt 
will  sooner  or  later  come  to  be,  universal,  that  only 
those  assets  that  can  be  verified  both  as  to  their  exist- 


CONTRACT   BONDS.  171 

cnce  and  their  value,  will  be  considered  in  estimating 
the  financial  resources  of  a  contractor.  There  is  ex- 
actly the  same  reason  for  verifying  the  financial  state- 
ment of  an  applicant  for  a  contract  bond  as  there  is  for 
investigating  the  past  record  of  an  applicant  for  a 
fidelity  bond.  We  do  not  accept  the  statements  of  the 
latter.  Why  should  we  accept  the  statements  of  the 
former  ?  It  is  a  business  proposition  in  which  sentiment 
has  no  place. 

Sec.   108.— The  Amount  of  Work  on  Hand.    A 

man  may  be  capable  of  building,  economically,  a  certain 
style  of  house  and  making  a  profit  at  current  prices; 
yet,  if  at  one  time  he  undertakes  the  construction  of  half 
a  dozen  such  houses  in  different  localties,  where  he  can- 
not give  his  personal  attention  to  each,  the  increased 
expense  resulting  from  the  lack  of  close  personal  super- 
vision, may  be  such  as  to  wipe  out  his  profit  or  cause  a 
loss.  Then,  too,  when  a  small  contractor  gets  a  large 
amount  of  work  on  hand,  his  accounts  usually  become 
so  involved  that  it  is  difficult  to  find  out  exactly  where 
he  stands ;  he  may  think  he  is  making  profit  when  he  is 
not.  It  is  important  therefore  to  see  that  a  contractor 
does  not  "outgrow  his  strength."  Assuming  that  he  is 
honest  and  personally  efficient,  the  amount  of  work  he 
can  safely  carry  on  will  depend  principally  upon  his 
financial  resources  and  the  efficiency  of  his  organiza- 
tion1 Large  contractors,  who  have  an  efficient  organi- 
zation, and  who  are  in  the  habit  of  sub-letting  large  parts 
of  the  work  and  requiring  their  sub-contractors  to  give 


iSee  two  preceding  Sections. 


172  CONTRACT   BONDS. 

bond  with  corporate  surety,  can  successfully  carry  on 
work  equal  to  eight  or  ten  times  the  amount  of  their  net 
resources.  The  principal  danger  is  from  the  small  con- 
tractor, who,  because  he  handles  a  few  contracts  suc- 
cessfully, wants  to  grab  everything  in  sight  and  at  once 
become  a  ''big  contractor."  Such  men,  even  where  they 
fully  measure;  up  in  other  respects,  should  not  be  per- 
mitted to  carry  more  than  about  six  times  the  amount 
of  their  net  available  assets. 

Sec.  109.— The  Nature  of  the  Contract.  As  we 
have  already  seen,  the  question  whether  or  not  a  con- 
tractor can  perform  a  particular  kind  of  work  will 
depend  upon  his  ability,  experience,  equipment  and 
financial  resources.  However,  he  may  be  able  to  do 
that  work  under  some  conditions,  but  not  under  others; 
and  his  success  or  failure  may  depend  largely  upon  the 
terms  of  the  contract  and  the  conditions  under  which 
the  work  must  be  done.  It  will  be  the  object  of  the 
succeeding  pages  to  indicate  some  of  the  dangers  that 
may  result  from  the  terms  of  the  contract,  it  being 
understood  that  we  shall  not  deal  with  the  difficulties  of 
doing  different  kinds  of  work.  That  matter  will  depend 
upon  the  ability,  experience,  resources,  etc.,  of  the  appli- 
cant, and  has  already  been  considered.1 

Sec.  110.— Adequacy  of  Contract  Price.  There  is 
always  a  possibility  that  a  contractor  will  not  be  able  to 
do  the  work  for  the  contract  price.  Such  inability  may 
result  from  causes  that  could  not  reasonably  have  been 
foreseen,  or  from  the  inefficiency  of  the  contractor,  or 


iSee  Sections  105-108. 


CONTRACT   BONDS.  173 

from  the  fact  that  the  price  is  too  low, — so  low  that  the 
most  efficient  contractor  could  not  do  the  work  for  the 
stipulated  price.  Theoretically,  the  contractor's  assets 
will  protect  the  surety  against  unforeseen  dangers ;  and, 
as  we  have  seen,  inefficient  contractors  should  not  be 
bonded.  But  surety  companies  must  also  guard  against 
the  case  where  the  price  is  really  too  low.  This  is  essen- 
tially important,  for  many  losses  have  resulted  from 
this  fact.  One  company  reports  that  in  making  a  par- 
tial examination  into  the  causes  of  its  losses  during  the 
year  1912,  it  found  that,  in  the  cases  examined,  nearly 
$65,000.00  was  directly  attributable  to  the  fact  that  the 
principal's  bid  was  too  low. 

In  case  the  contract  is  awarded  to  a  particular  con- 

r 

tractor,  without  competitive  bidding,  about  the  best  it  is 
practicable  to  do  is  to  compare  the  contract  price  with         ,          *  t 
the  estimate  of  the  architect  or  engineer.    If  that  com-^ 
parison  is  favorable,  it  may  fairly  be  assumed  that  the 
price  is  commensurate  with  the  work.    A  man  who  has 
sufficient  reputation  and  standing  to  get  contracts  with- 
out  competition   usually   has   enough    experience   and 
ability  to  estimate  the  cost  of  the  work  with  reasonable 
accuracy,  and  common  sense  enough  not  to  undertake 
the  work  for  an  inadequate  price. 

If,  however,  it  is  a  case  of  competitive  bidding,  the 
greatest  care  should  be  exercised  to  obtain  the  names  of 
the  other  bidders  and  the  correct  amounts  of  their 
respective  bids.  This  information  can  generally  be 
gotten  from  the  owner  or  architect.  If  other  reputable 
contractors  have  bid  only  a  little  more  than  the  sue- 


174 


CONTRACT    BONDS. 


cessful  bidder,  the  difference  may  be  ascribed  to  the 
natural  differences  in  different  calculations;  but  if  the 
successful  bidder  is  much  below  the  others,  it  is  a  sign 
that  an  error  of  some  kind  probably  has  been  made,  and 
that  the  bid  is  not  commensurate  with  the  work.  And 
it  is  not  always  sufficient  to  compare  the  bid  of  the 
successful  bidder  with  that  of  the  next  higher  man,  for 
he  likewise  may  be  in  error.  The  comparison  should 
rather  be  made  with  the  general  average  of  all  bids.  It 
is  difficult  to  state  what  percentage  of  difference  would 
be  the  probable  result  of  different  calculations,  and 
what,  a  sign  of  error ;  for  circumstances  alter  cases.  In 
general,  it  may  be  said  that  a  difference  of  five  per  cent, 
would  not  ordinarily  be  a  cause  for  alarm,  but  that  one 
of  ten  per  cent,  would  be  a  sign  of  error.  And,  in  the  lat- 
ter event,  the  bond  should  not  be  signed  unless  the  con- 
tractor is  so  strong  financially  and  of  such  splendid 
reputation  that  he  undoubtedly  could  and  would  stand 
a  loss  of  that  amount,  plus  the  possible  loss  from  unfore- 
seen calamities.  Likewise,  any  difference  between  five 
and  ten  per  cent,  should  be  a  warning,  and  care  should 
be  taken  to  see  that  the:  contractor  is  able  and  willing 
to  take  care  of  the  possible  loss. 

As  a  general  proposition,  it  will  make  little  differ- 
ence whether  the  contract  is  considered  as  a  whole,  and 
a  definite  price,  in  the  aggregate,  provided  for  all  the 
work,  or  whether  the  contract  is  divided  into  a  number 
of  units,  and  a  definite  price  provided  for  each  unit. 
It  is  about  as  easy  to  calculate  the  cost  in  the  one  case 
as  in  the  other,  so  the  chance  that  the  cost  will  exceed 


CONTRACT    BONDS.  175 

the  estimate  is  practically  the  same  in  both  cases.  But 
contracts  are  sometimes  let  on  the  " percentage  basis," 
which  means  that  the  contractor  agrees  to  do  the  work 
for  cost  plus  a  percentage, — the  percentage  being  com- 
pensation for  the  skill,  experience,  equipment,  etc.,  of 
the  contractor.  This  eliminates,  to  a  certain  extent,  the 
speculative  feature,  and  such  contracts  are  more  desir- 
able, from  a  standpoint  of  the  surety,  than  the  ordinary 
contract,  under  which  the  contractor  takes  the  risk  of 
the  cost  exceeding  the  contract  price.  As  a  rule,  such 
contracts  are  awarded  only  to  the  most  efficient  con- 
tractors; and,  unless  the  percentage  is  so  small  as  to  be 
unremunerative,  it  is  fair  to  assume  that  the  contractor 
will  complete  the  contract.  The  dangerous  feature  about 
such  contracts  is  that  the  contractor  is  generally 
required  to  guarantee  that  the  work  will  not  cost,  in  the 
aggregate,  more  than  a  specified  sum;  and,  if  it  exceeds 
that  sum,  he  is  required  to  stand  the  difference.  It  is 
very  important  therefore  to  ascertain  that  the  amount 
of  the  guarantee  is  well  beyond  a  liberal  estimate  of  the 
cost.  The  real  risk  of  the  surety  is  in  proportion  to 
the  possibility  or  probability  that  the  cost  will  exceed 
the  guarantee.  If  it  is  a  case  of  competitive  bidding, 
the  amount  of  the  other  guarantees  should  be  obtained 
and  a  comparison  as  above  indicated  should  be  made. 

Sec.  111.— The  Payment  of  the  Price.  A  prospective 
surety  ought  to  know  not  only  that  the  price  is  ade- 
quate, but  that  it  is  to  be  paid  in  a  satisfactory  man- 
ner. 

In  the  first  place,  although  calculations  are  gen- 


176  CONTRACT   BONDS. 

erally  based  upon  a  price  in  money,  it  often  happens 
that  the  contract  provides  for  the  giving  of  stocks, 
bonds,  notes  or  other  securities  in  payment  for  the 
work.  In  such  cases,  the  risk  ought  not  to  be  accepted 
unless  sufficient  securities  are  to  be  received  to  yield 
immediately,  in  money,  the  estimated  cost  of  the  work 
plus  the  profit;  and  the  contractor  ought  to  have  a 
binding  contract  by  which  he  can  immediately  dispose 
of  the  securities  at  a  price  that  will  yield  that  sum. 
This  matter  of  disposing  of  the  securities  should  not  be 
left  to  chance  or  speculation,  but  a  definite  arrange- 
ment with  a  resp'onsible  concern  should  be  made  in 
advance;  and  this  arrangement  should  not  be  con- 
ditioned upon  the  validity  of  any  issue  of  bonds,  or 
upon  any  other  matter.  All  such  questions  should  be 
determined  in  advance;  and  the  arrangement  should 
be  absolute,  so  that  the  expected  amount  of  cash  can, 
under  any  circumstances,  be  immediately  realized.  If 
the  surety  should  be  compelled  to  complete  the  con* 
tract,  he  would  not  relish  doing  so  for  a  lot  of  securities 
of  doubtful  value. 

In  the  second  place,  it  is  important  that  a  proper 
percentage  of  the  contract  price — neither  too  much  nor 
too  little — be  retained  by  the  owner  until  completion. 
Enough  must  be  paid  during  progress  to  enable  the 
contractor,  with  the  aid  of  his  resources,  to  finance 
the  work;  that  is,  to  provide  the  necessary  labor  and 
materials.  At  the  same  time,  it  is  to  be  borne  in  mind 
that  the  percentage  to  be  retained  will,  in  the  event  of 
default  by  the  contractor,  be  available  for  completing 


CONTRACT   BONDS.  177 

the  work,  and  is  therefore  a  margin  of  safety  for  the 
surety, — the  margin  being  in  proportion  to  the  amount 
retained. 

Some  building  contracts  provide  for  the  payment 
of  a  certain  percentage  of  estimates  to  be  made  periodi- 
cally by  the  architect  or  engineer  in  charge;  the  per-, 
centage   varying   from   about  seventy-five   to   ninety. 
Others  provide  for  the   payment  of  stipulated  sums  - 
when  the   work  has  progressed  to   stipulated  points., 
Any  such  arrangement  may  be  satisfactory,   so  long 

1 J         X         vi 

as  the  contractor  never,  at  any  time  during  progress,  '7 
receives  the  full  value  of  the  work  done;  it  being  al- 
ways understood  that  the  greater  the  retained  percent- 
age, the  smaller  the  chance  of  loss,  provided  enough 
is  paid  to  relieve  the  contractor  of  embarrassment  in  " 
financing  the  job. 

Sec.  112.— Time  for  Completion.  No  matter  how 
efficient  a  contractor's  organization  may  be,  it  takes 
time  to  erect  buildings  and  other  works;  and  before 
signing  a  contract  bond,  the  surety  ought  to  ascertain 
that  the  contract  gives  ample  time  to  do  the  work  and 
that  provision  is  made  for  an  automatic  extension  of 
the  time  in  case  the  contractor  should  be  delayed  by 
causes  beyond  his  control ;  as  for  example,  by  a  general 
strike  in  the  trade,  by  fire,  tornado,  or  bad  weather.  This 
is  essentially  important  and  should  never  be  over- 
looked; for,  in  many  cases  where  there  is  a  dispute 
growing  out  of  a  delay,  the  delay  is  the  result  of  cir- 
cumstances beyond  the  contractor's  control.  All  such 


178  CONTRACT   BONDS. 

disputes  could  be  avoided  by  making  a  proper  provis- 
ion in  the  contract  or  bond.1 

In  many  cases,  the  contract  provides  for  the  pay- 
ment of  a  definite  sum  of  money  daily  as  liquidated 
damages  for  delay,  and  care  should  be  taken  to  ascer- 
tain that  this  sum  is  not  exorbitant  but  represents  the 
approximate  amount  of  damages  that  will  actually  be 
sustained  by  the  delay.  It  is  not  fair  for  the  owner  to 
make  a  profit  out  of  the  contractor's  delay;  all  the  con- 
tractor and  his  surety  ought  to  be  asked  to  do  is  to 
pay  the  actual  damages  suffered.  The  true  amount  of 
damages  will  ordinarily  be  the  fair  net  rental  value  of 
the  premises;  and  the  amount  named  in  the  contract 
should  not  exceed  that  sum. 

Sec.  113. — Liability  in  case  of  Destruction  of  Build- 
ing by  Fire,  or  Other  Cause  During  Construction.  It 
is  the  law  of  most  of  the  states  that  in  the  absence  of  an 
express  provision,  a  contractor  is  not  released  from  his 
obligation  to  complete  a  building  by  the  destruction  of 
that  building  during  construction,  even  by  causes  be- 
yond his  control,  as  for  example,  by  fire.  The  surety  on 
a  contractor's  bond  does  not,  however,  contemplate  such 
a  risk, — so  it  is  necessary  to  ascertain,  either  that  the 
contract  or  the  bond  exempts  the  contractor  from  such 
responsibility,1  or  that  adequate  insurance  is  taken  out, 
payable  to  the  owner  and  contractor,  as  their  interests 
may  appear. 

Sec.  114.— Liability  for  Personal  Injuries.  A  Con- 
tractor is  likely  to  be  compelled  to  respond  in  damages 


iSee    Section   116. 


CONTRACT   BONDS.  179 

for  personal  injuries  sustained  by  employees  or  other 
persons  in  the  course  of  the  construction  of  the  work 
covered  by  the  contract.  A  number  of  the  states  have 
recently  enacted  workmen's  compensation  laws,  which 
provide  for  a  very  strict  liability  on  the  part  of  contrac- 
tors and  other  employers  who  are  engaged  in  hazardous 
undertakings.  These  laws  generally  provide  that  the 
employer  shall  be  liable  to  the  employee  regardless  of  the 
question  of  negligence  on  the  part  of  himself  or  his  em- 
ployees. As  a  rule  the  surety  on  the  contractor's  bond 
is  not  directly  liable  for  injuries  to  employees,  yet  the 
payment  of  such  damages  by  the  contractor  would  to 
that  extent  reduce  the  contractor's  ability  to  complete 
the  contracts  on  hand  and  take  care  of  possible  losses; 
and  all  contractors  should  protect  themselves  against 
this  liability  by  taking  out  employer's  liability  insur- 
ance in  an  adequate  amount  and  in  a  recognized  com- 
pany, and  this  is  especially  necessary  in  those  states 
where  the  employer's  liability  or  workmen's  compensa- 
tion acts  have  been  recently  passed.  It  is  suggested 
that  all  contractors,  though  they  may  be  doing  only  a 
small  amount  of  work  and  that  of  a  comparatively  sim- 
ple character,  be  required  to  carry  liability  insurance. 

In  the  case  of  an  injury  to  a  person  not  an  em- 
ployee, the  owner  as  well  as  the  contractor  may  be  held 
liable  for  damages ;  and  under  many  contracts  and  bonds 
the  surety  would  be  compelled  to  reimburse  the  owner 
for  the  loss.  In  such  cases  therefore,  in  the  event  of 
the  contractor's  insolvency,  the  surety  may  be  liable  not 
only  to  complete  the  contract  but  also  to  respond  in 


180  CONTRACT   BONDS. 

damages  for  personal  injuries.  If  the  contract  and  bond 
provide  for  this  liability  on  the  part  of  the  surety,  the 
bond  should  in  no  event  be  signed  unless  the  contractor 
is  fully  protected  by  public  liability  insurance.  It  is 
the  duty  of  underwriters  to  look  carefully  into  this 
matter  of  employers'  and  public  liability  insurance,  as 
liability  for  accidents  is  becoming  a  very  serious  matter. 

Sec.  115. — Liability  of  Surety  for  Labor  and  Ma- 
terials. In  order  to  satisfy  the  obligation  of  his  surety, 
a  contractor  must,  in  the  majority  of  cases,  not  only 
complete  the  work  covered  by  his  contract  but  he  must 
also  pay  for  all  labor  and  materials  that  may  have  been 
used  in  carrying  on  the  work ;  otherwise  his  surety  may 
be  compelled  to  pay  for  them.  Indeed,  the  most  frequent 
element  of  default  on  the  part  of  contractors  is,  not  in 
failing  to  complete  the  work,  but  in  failing  to  pay  for 
labor  and  materials. 

The  liability  of  the  surety  arises  in  this  way :  nearly 
all  of  the  states  have  made  provisions  by  which  those 
who  have  done  work  and  furnished  materials  to  con- 
tractors may,  to  a  greater  or  less  extent  and  upon  cer- 
tain conditions,  file  a  lien,  commonly  known  as  a 
mechanic's  lien,  against  the  property  for  the  erection 
of  which  the  materials  were  furnished,  and  recover  from 
the  owner  the  amount  left  unpaid  by  the  contractor. 
Consequently,  the  owner  generally  requires  of  the  con- 
tractor a  bond  conditioned  not  only  to  complete  the 
work  but  to  protect  him  against  liability  for  labor  and 
materials  furnished  to  the  contractor.  In  some  cases, 
however,  a  contractor  is  required  by  law  to  give  a  bond 


CONTRACT   BONDS.  181 

which  contains  a  direct  obligation  to  pay  all  bills  for 
labor  and  materials,  and  under  which  laborers  and  fur- 
nishers of  material  have  a  right  of  action  directly 
against  the  surety. 

The  underlying  principle  of  mechanic's  liens  is 
that  a  man  ought  not  to  be  permitted  to  have  the  bene- 
fit of  the  labor  or  material  of  another  without  paying 
for  it.  Where  the  owner  of  the  property  orders  the 
materials,  the  application  of  the  principle  is  quite  sim- 
ple, but  where  the  work  is  let  to  a  contractor  and  he 
orders  the  labor  and  material,  the  matter  is  more  com- 
plicated; for  the  owner  may,  in  effect,  be  required  to 
pay  for  the  materials  twice, — once  to  the  contractor  and 
again  to  the  furnisher.  The  difficulty  in  applying  the 
principle  has  resulted  in  different  laws  in  the  different 
states  with  little  or  no  uniformity,  although  with  some 
similarity. 

There  are  at  least  three  different  aspects  in  which 
this  subject  is  presented. 

First:  As  a  general  rule,  public  property,  that  is 
to  say,  property  belonging  to  the  United  States,  or  a 
state,  a  county  or  a  city,  is  not  subject  to  mechanic's 
liens ;  and  a  statute  which  provides  in  general  terms  for 
such  liens  is  not  ordinarily  construed  to  provide  for  a 
lien  on  public  property.  In  order  that  those  who  fur- 
nish labor  and  material  for  public  work  may  have  the 
right  to  a  lien  on  the  property,  or  to  recover  from  the 
contractor's  surety,  there  must  be  a  statute  which  in 
express  terms  gives  such  right.  There  are,  however,  a 
number  of  such  statutes.  An  Act  of  Congress  pro- 


182  CONTRACT   BONDS. 

vides  that  one  who  contracts  with  the  United  States 
shall  execute  the  usual  penal  bond,  with  the  addi- 
tional obligation  that  the  contractor  shall  promptly 
make  payments  to  all  persons  supplying  him  labor  and 
materials  in  the  prosecution  of  the  work  provided  for 
in  the  contract.  The  persons  supplying  labor  and 
material  are  given  a  right  of  action  under  the  bond 
directly  against  the  surety,  and  are  not  required  to 
establish  any  lien  by  filing  a  claim.  A  similar  law  ex- 
ists in  some  of  the  States  with  respect  to  contracts  for 
public  work.  In  some  cases,  a  separate  bond  is  re- 
quired, and  in  others,  the  additional  obligation  is  con- 
tained in  the  regular  contract  bond.  Where  such  direct 
liability  exists,  a  breach  of  the  contract  on  the  part  of 
the  owner  (such  as  an  overpayment  to  the  contractor, 
or  a  material  change  in  the  contract)  would  not  affect 
the  liability  of  the  surety,  so  far  as  the  payment  for 
labor  and  materials  is  concerned;  and  since  there  are 
no  details  as  to  giving  notice,  filing  claims,  etc.,  which 
the  claimant  may  omit  to  perform,  it  is  fair  to  assume 
that,  where  such  direct  liability  exists,  the  surety  will 
be  compelled  to  pay  every  bill  which  the  contractor 
fails  to  pay. 

Second:  In  the  case  of  contracts  for  private  work, 
there  are  two  principal  classes  of  laws.  One  class,  which 
follows  what  is  known  as  the  Pennsylvania  rule,  pro- 
vides that  the  laborers  and  furnishers  of  material  shall 
have  a  lien  on  the  building  and  the  land  on  which  it 
stands  for  whatever  may  be  due  them  for  labor  and 
materials  furnished  for  the  work.  In  order  to  perfect 


CONTRACT   BONDS.  183 

such  a  lien,  they  must  generally  file  in  some  court, 
within  the  time  and  in  the  manner  required  by  law,  a 
detailed  statement  of  their  claims.  In  some  cases  the 
lien  may  be  enforced  in  an  action  directly  against  the 
surety,  but  in  most  states,  the  lien  is  enforced  only 
against  the  property  and  its  owner,  and  the  owner  is 
left  to  his  remedy  against  the  surety.  The  fact  that  it 
is  necessary  for  a  claimant  to  perfect  his  lien  by  filing 
his  claim  within  a  certain  time  and  in  a  certain 
manner  and  form  sometimes  operates  to  relieve  the 
surety  from  liability;  for  it  sometimes  happens  that  a 
claimant  does  not  perfect  his  lien,  either  because  a  lien 
for  the  particular  labor  or  materials  cannot  be  had,  or 
because  he  did  not  suspect,  until  too  late,  that  the  con- 
tractor would  fail  to  pay,  or  because  of  some  negligence 
on  the  part  of  himself  or  his  agents.1 


iThe   Pennsylvania   rule  is   in   force  in   the   following   States : 

ARKANSAS. — Kirby's  Digest  of  1904.  Sees.  4970-75.  Sec.  4975. 
which  limited  the  liability  of  the  owner,  was  repealed  by  Sec.  6  of 
Act  446  of  Acts,  1911. 

CALIFORNIA.— Code  C.  P.,  Sees.  1183-84,  as  amended  by  Act,  1911, 
Ch.  681.  Claimants  have  a  right  of  action  directly  against  the 
surety. 

DELAWARE. — Rev.  Code,  as  amended  1893,  p.  818,  being  Ch.  145, 
Vol.  16,  Laws  Del. 

GEORGIA. — Code,  Sees.  3352-3. 

IDAHO.— Code  C.  P.,  1909,  Sec.  5115. 

INDIANA.— Burns  Anno.  Statutes,  Sec?.  8295  et.  seq.,  Ch.  116, 
Acts  1909. 

LOUISIANA— Act  167  of  Act  of  1912.  Claimants  have  a  right  of 
action  directly  against  the  surety. 

MASSACHUSETTS.— Ch.   197,  R.   S.,   1902. 

MARYLAND.— Art.  63,  Sec.  1,  P.  G.  L. ;  but  no  lien  for  materials 
in  Baltimore  City. 

MINNESOTA.— R.  S.,  1905.  Sec.  3505.  G.  S.  1913,  Sec.  7020. 

MISSOURI. — Annotated  Statutes,  1906.  Sec.  4203.  Rev.  St.  1909, 
Sec.  8212. 

MONTANA. — Rev.  Code,  Sec.  7290  et.  seq. 

NEBRASKA. — Cobbey's  Annotated   Statutes,    Sec.    7101. 

RHODE  ISLAND — Ch.  257,  Sec.  6,  General  Laws  1909;  Hatch  vs. 
Faucher,  15  R.  I.  459.  Applicable  only  to  labor  and  not  to  materials. 

SOUTH  DAKOTA.— Compiled  Laws  1913,  p.  463-a ;  Laws  1913,  Ch. 
263. 

TEXAS.— Sayles  Civ.  St.,  Sec.  3294. 

WASHINGTON. — Rem.  and.  Bal.  Code,  Sec.  1129. 

WISCONSIN.— Wisconsin   Statutes   1911,   Sec.   3315. 

WYOMING.— Compiled   Statutes,    Sees.    3799,    3816. 


184  CONTRACT   BONDS. 

Third:  The  other  main  class  of  laws,  which  fol- 
lows what  is  known  as  the  New  York  rule,  provides  that 
the  lien  shall  attach  only  to  the  unpaid  balance  of  the 
contract  price  due  by  the  owner  to  the  contractor  after 
the  contract  has  been  completed;  so  that  if  the  owner 
pays  the  entire  contract  price  to  the  contractor,  in  com- 
pliance with  the  contract,  the  claimant  can  recover 
nothing;  or  if  the  contractor  defaults,  and  the  owner  is 
required  to  complete,  the  claimants  are  entitled  only  to 
the  balance  of  the  contract  price,  after  the  cost  of  com- 
pletion is  deducted.  In  such  cases,  the  right  to  the 
lien  does  not  affect  the  surety's  liability  at  all,  and  may 
be  ignored;  for,  if  the  owner  makes  his  payments  in 
strict  accordance  with  the  contract,  he  cannot  be  held 
liable  for  more  than  the  contract  price,  and  therefore 
the  surety  will  be  liable  for  nothing.  If,  on  the  other 
hand,  he  overpays  the  contractor  and  thereby  incurs  a 
liability  for  liens,  he,  by  that  very  act,  releases  the 
surety  from  all  liability.  The  only  obligation  of  the 
surety  is  to  pay  the  expense  of  having  the  liens  removed 
from  the  record.1 


iThe  New  York  rule,  with  modifications  as  shown,  is  in  force 
in  the  following  States : 

ALABAMA. — Sec.  4754,  Code  1907  ;  but  if  the  person,  firm  or  cor- 
poration, before  furnishing  any  material,  shall  notify  the  owner  in 
writing  that  certain  specified  material  will  be  furnished  to  the 
contractor  for  use  in  the  building,  the  furnisher  of  such  material 
shall  have  a  lien  for  the  full  price  without  regard  to  whether  the 
amount  of  the  claim  exceeds  the  unpaid  balance  or  not,  unless  the 
owner  shall  notify  the  furnisher  in  writing  before  the  material  is 
used  that  he  will  not  be  responsible  for  the  price  thereof. 

COLORADO. — Sees.  4025-6,  Colorado  Statutes  Annotated,  1911,  pro- 
vided the  contract  price  is  payable  in  installments  as  the  work 
progresses  and  at  least  15  per  cent,  is  reserved  until  35  days  after 
completion. 

CONNECTICUT. — Sec.  4138,  General  Statutes,  1902 ;  Waterbury 
Lbr.  Co.,  vs.  Coogan,  73  Conn.  519,  48  Atl.  204. 

DISTRICT  OF  COLUMBIA. — Sec.  1240,  Code  for  D.  C.,  as  amend- 
ed to  March  4th,  1911  (Meyers). 

FLORIDA.— R.  S.  1906,  Sec.  2211;  Stringfellow  vs.  Coons,  57  Fla. 
158,  49  So.  1019. 


CONTRACT   BONDS.  185 

Sec.  116.— Limitation  of  Liability  by  Conditions  in 
the  Bond.  In  perhaps  the  majority  of  cases,  surety 
companies  are  permitted  to  issue  their  own  forms  of 
contract  bonds,  and  those  forms  generally  impose  cer- 
tain limitations  and  restrictions  upon  the  liability  of 


ILLINOIS. — Rule  substantially  the  same  as  in  New  Hampshire. 
Kurd's  Rev.  St.,  Ch.  82,  Sees.  35-41.  If  the  original  contract  pro- 
vides that  there  shall  be  no  liens  upon  the  improved  property  for  labor 
or  materials,  then  sub-contractors  and  materialmen  are  not  entitled 
to  any  lien.  Kelly  vs.  Johnson,  251,  111.  135. 

IOWA. — This  rule  was  undoubtedly  in  force  until  July  4th,  1913. 
(Code,  Sec.  3093),  but  an  act  passed  at  that  time  may  be  con- 
strued to  require  of  the  contractor  a  bond  conditioned  to  pay  all 
bills  for  labor  and  materials.  Pending  a  construction  of  this  act 
by  the  courts,  it  should"  be  assumed  that  the  surety  is  liable  for  all 
bills  left  unpaid  by  the  contractor. 

KANSAS. — Statutes  provide  that  owner  is  not  liable  for  more  than 
he  agreed  to  pay  the  original  contractor,  but  the  risk  of  all  pay- 
ments made  to  the  original  contractor  is  upon  the  owner  until  the 
expiration  of  60  days  after  completion ;  the  owner  being  entitled 
to  credit  for  payments  made  to  laborers  and  sub-contractors  during 
the  60  days,  provided  that  where  the  cost  exceeds  the  contract  price, 
he  is  entitled  to  credit  only  to  the  extent  of  the  pro  rota  amount  to 
which  the  other  laborers  and  sub-contractors  would  have  been  en- 
titled if  they  had  filed  their  liens.  Gen.  St.,  1909,  Sec.  6246  ;  Fossett 
vs.  Lumber  Co.,  76  Kan.  428).  If  the  owner  reserves  the  right  to 
and  does  pay  to  laborers  and  sub-contractors,  upon  orders  of  the  con- 
tractor, all  that  becomes  diue  under  the  contract  and  refrains  from 
paying  sub-contractors  more  than  about  75  per  cent,  of  the  value 
of  the  work  done  by  them,  he  will  not  likely  be  required  to  pay  a 
substantial  sum  in  excess  of  the  contract  price.  It  is  important,  for 
the  protection  of  the  surety,  that  such  a  provision  be  put  in  the 
contract,  and  that  the  owner  be  obligated,  by  a  condition  in  the 
bond,  to  comply  with  it.  It  is  probable  that  when  the  owner  pays 
the  general  contractor,  and  he  in  turn  pays  the  laborers  and  sub- 
contractors, the  owner  will  be  entitled  to  credit  as  if  he  had  paid 
them  direct,  but  this  point  does  not  appear  to  have  been  expressly 
decided. 

KENTUCKY. — The  law  is  substantially  the  same  as  in  Kansas,  and 
It  seems  to  have  been  decided  that  the  owner  will  be  entitled  to 
credit  for  sums  paid  by  the  general  contractor  to  sub-contractors, 
provided  that  if  the  sub-contractors  can  recover  from  the  owner  less 
than  the  full  amount  of  their  claims,  the  sum  paid  by  the  general 
contractor  will  first  be  applied  to  the  portion  not  recoverable  from 
the  owner.  Carroll's  Statutes.  1909,  Sec.  2463.  Central  Trust  Co. 
vs.  Richmond  R.R.  Co.,  68  Fed.  90;  15  C.  C.  A.  273  ;  41  L.  R.  A. 
458. 

MICHIGAN.— Howell's  Michigan  Statutes,  Sec.  13766  (Compiled 
Laws,  Sec.  10710)  ;  Smalley  vs.  Gearing  121  Mich.  190.  But  owner 
must  require  contractor  to  furnish  sworn  statement  of  the  number  and 
names  of  every  sub-contractor  or  laborer  in  his  employ  and  of  every 
person  furnishing  materials,  giving  the  amount  due  and  to  become 
due ;  and  the  risk  of  all  payments  made  before  the  receipt  of  such 
statement  is  upon  the  owner  until  the  expiration  of  60  days  after 
completion  ;  and  no  payment  made  before  the  expiration  of  60  days 
Bhall  defeat  any  liens  unless  the  payments  be  distributed  among 
sub-contractors,  material  men  and  laborers  If  the  owner  is  ex- 
pected to  comply  with  the  law,  an  express  provision  to  that  effect 
should  be  inserted  in  the  bond. 

MISSISSIPPI.— Code,  1906,  Sec.  3059,  as  amended  by  Act  1912,  Ch. 
232;  Herron  vs.  Warren,  61  Miss.  509. 

NEW  HAMPSHIRE. — Laborer  or  furnisher  of  material  may  have  a 
lien  for  full  amount,  if  he  gives  notice  in  writing  to  the  owner  or 


186  CONTRACT   BONDS. 

the  surety  and  give  the  surety  certain  rights  it  would 
not  otherwise  have.  The  bonds  of  the  several  com- 
panies, although  by  no  means  uniform,  usually  contain, 
among  others,  provisions  to  the  effect  (1)  that  in  the 
event  of  default  on  the  part  of  the  principal,  the  surety 
shall  have  the  right,  at  its  option,  to  assume  the  con- 
tract and  to  sublet  or  complete  it;  and  (2)  that  the 
surety  shall  not  be  liable  for  any  loss  or  damage  re- 
sulting from  mob,  riot,  civil  commotion  or  a  public 
enemy,  or  from  "strikes"  or  labor  difficulties,  or  from 
accident,  fire,  lightning,  tornado  or  earthquake. 

The  first  provision  is  a  valuable  one  because,  in 
many  cases  where  the  owner  is  permitted  to  complete  a 
job  on  which  a  bonded  contractor  has  defaulted,  he  will 
interpret  the  specifications  very  liberally  in  his  favor, 
and  will  likely  expend  considerably  more  money  than 

to  the  person  having  charge  of  the  property,  before  performing  the 
labor  or  furnishing  the  material,  that  he  will  claim  a  lien,  and  gives 
an  additional  notice  as  often  as  once  in  30  days  of  the  labor  per- 
formed and  material  furnished  during  the  preceding  30  days.  The 
owner  Is  required  to  retain  out  of  the  sums  due  or  to  become  due 
to  the  contractor,  a  sufficient  sum  to  pay  the  claim.  If  the  notice 
is  given  after  the  labor  is  performed  or  the  material  furnished,  the 
lien  will  be  valid  only  to  the  extent  of  the  amount  due  or  that 
may  become  due  to  the  contractor.  Public  Statutes,  Ch.  141,  Sees. 
13-15,  as  amended  by  the  Act  1911,  Ch.  116.  It  may  be  that  the 
failure  of  the  owner,  after  receipt  of  such  a  notice,  to  retain  enough 
to  pay  the  claim  would  release  the  surety ;  although  if  the  owner 
is  expected  to  retain  the  money,  it  is  advisable  to  put  an  express 
provision  to  that  effect  in  the  bond. 

NORTH  CAROLINA.— Pell's  Revisal  of  1908,   Sec.  2019  and  notes. 

NEW  JERSEY. — Sees.  2  and  3  of  the  Mechanics'  Lien  Law  as  found 
in  Comp.  Statutes  1910,  pgs.  3293-4,  provided  the  contract,  or 
a  duplicate  thereof,  be  filed  in  the  office  of  the  Clerk  of  the  County 
in  which  the  building  is  situate  at  or  or  before  the  time  when  the 
building  is  begun.  La  Foucherie  vs.  Knutzen,  58,  N.  J.  L.  234,  33 
A'tl.  203. 

OHIO. — Act  passed  April  16th,  1913,  which  is  similar  to  the  law 
in  Michigan.  If  the  owner  is  expected  to  comply  with  the  law  an 
express  provision  to  that  effect  should  be  inserted  in  the  bond. 

OKLAHOMA. — The  law  is  substantially  the  same  as  in  Kansas  and 
will  no  doubt  be  construed  in  the  same  way.  Comp.  Laws  1909,  Sec. 
6153. 

SOUTH  CAROLINA.— Code  1912,  Sec.  4114. 

VERMONT.— Pub.   Statutes,   1906,  Sees.  2644-5. 

VIRGINIA.— Pollard's  Code,  Sec.  2477;  Schreiber  vs.  Bank,  99  Va. 

WEST  VIRGINIA.— Code  1906,  Sec.  3114;  Code  1913,  Sec.  3846, 
provided  the  contract  is  recorded  in  the  office  of  the  Clerk  of  the 
County  Court  prior  to  the  performance  of  the  labor  or  the  furnish- 
ing of  the  material. 


CONTRACT   BONDS.  187 

the  contractor  would  have  done,  and  may  therefore  im- 
pose upon  the  surety  company  a  loss  it  would  not  other- 
wise have  sustained.  It  will  be  seen  that  where  the 
liability  of  the  owner  is  limited  to  the  amount  of  the 
contract,  that  is  to  say,  where  the  surety  is  liable  for 
any  excess  over  that  sum,  and  where  the  owner  is  per- 
mitted to  carry  out  the  contract  and  interpret  the  speci- 
fications, he  is  apt  to  be  rather  liberal  with  himself.  The 
surety  is  helpless  because  it  is  seldom,  if  ever,  possible 
to  show  that  the  owner  has  done  a  better  job  than  is 
specified. 

The  second  provision  is  also  valuable,  in  that  it 
relieves  the  surety  from  the  chance  of  loss  on  account 
of  extraordinary  hazards.  It  is  proper  that  the  surety 
should  be  so  relieved,  as  they  are  not  proper  risks  for  a 
surety  company,  and  the  owner  should  protect  himself 
by  proper  insurance.  The  premium  paid  to  the  surety 
company  for  the  bond  does  not  enable  it  to  purchase 
such  insurance  nor  to  take  the  risk  of  such  a  loss. 

In  some  states,  it  is  necessary  for  contractors  to 
give  a  statutory  form  of  bond  in  which  the  surety  is 
not  permitted  to  impose  any  limitations  upon  its  lia- 
bility as  fixed  by  the  contract  and  specifications.  And 
in  some  cases,  the  owner  will  not  accept  a  bond  that  im- 
poses any  such  limitations.  In  all  such  cases,  it  is  par- 
ticularly important  to  see  that  the  contract  makes 
proper  provision  for  the  protection  of  the  contractor 
and  his  surety  from  extraordinary  hazards,  or  that  ade- 
quate protection  is  provided  by  insurance.1  Otherwise, 


iSee  Sections  113-114. 


188  CONTRACT   BONDS. 

more  than  the  usual  caution  in  issuing  the  bond  is  nec- 
essary. 

Sec.  117. — Where  Contract  Antedates  the  Applica- 
tion for  the  Bond.  The  fact  that  a  contract  bond  is 
applied  for  a  considerable  time  after  the  signing  of  the 
contract  is  a  suspicious  circumstance  which  should  be 
carefully  investigated.  It  may  be  an  indication  either 
that  the  contractor  has  made  application  to  other  com- 
panies for  the  bond  and  been  rejected,  or  that  he 
started  the  work  without  bond  and  that  the  owner, 
finding  he  was  not  making  satisfactory  progress,  or  that 
he  was  not  paying  his  bills,  decided  to  require  a  bond. 
The  result  may  be  that  to  execute  the  bond  would  be 
to  assume  liability  for  a  defaulting  contractor.  In  such 
cases  it  is  advisable  to  require  a  full  and  satisfactory 
explanation  of  the  delay ;  and,  if  the  delay  has  been  for 
as  much  as  two  weeks,  to  require  of  the  owner  a  certifi- 
cate to  the  effect  that  the  contractor  is  not  in  default 
and  that  there  is  no  more  reason  for  requiring  the  bond 
than  there  was  when  the  contract  was  signed.  This  is 
not  a  merely  theoretical  danger;  the  records  of  surety 
companies  will  show  that  they  have  been  thrown  almost 
immediately  into  severe  losses  by  not  observing  this 
danger  signal.  It  is  difficult  enough,  when  every  pre- 
caution is  taken,  to  discover  the  contractors  who  are  at- 
tempting, by  false  statements  or  other  means,  to  get 
bonds  to  which  they  arei  not  entitled;  so  that  it  is  im- 
portant to  consider  carefully  every  indication  of  dan- 
ger. 

Sec.  118.— The  Underwriting  of  Supply  Contract 


CONTRACT   BONDS.  189 

Bonds.  While  the  great  majority  of  contract  bonds 
are  written  in  connection  with  building  contracts,  yet  a 
considerable  number  are  required  to  guarantee  merely 
the  future  delivery  of  merchandise.  Such  bonds  are 
known  as  supply  contract  bonds,  and  the  term  is  lim- 
ited to  cover  contracts  only  for  the  delivery  of  the  mer- 
chandise and  not  those  requiring  the  contractor  to  in- 
stall it  or  to  do  anything  other  than  deliver  it. 

In  underwriting  these  bonds,  the  general  princi- 
ples heretofore  outlined  for  the  underwriting  of  build- 
ing contract  bonds  will  in  the  main  be  applicable.1  How- 
ever, supply  contracts  generally  require  no  especial 
skill,  and  payments  are  usually  made  promptly  upon 
delivery  of  the  merchandise  so  that  the  capital  is  not 
tied  up  for  a  long  period.  The  risk  is  therefore  not  as 
hazardous  as  on  building  contract  bonds,  and  a  man 
may  be  permitted  to  have  on  hand  perhaps  two  or  three 
times  as  much  work  as  would  a  building  contractor  with 
the  same  resources.2  The  adequacy  of  the  price  is  per- 
haps the  principal  question  to  be  determined;  and,  as 
in  the  case  of  building  contracts,  it  is  necessary  to  ex- 
amine the  other  bids,  if  any,  and  to  get  all  available  in- 
formation on  this  point.3  So  far  as  the  adequacy  of  the 
contract  price  is  concerned,  these  contracts  are  pre- 
sented in  four  aspects. 

In  the  first  place,  the  applicant  may  be  the  owner 
of  the  merchandise  which  he  has  agreed  to  sell  and  de- 
liver, and  may  be  holding  it  for  that  purpose.  In  that 


iSee  Sections  102-112. 
2See  Section  107. 
sSee  Section  110. 


190  CONTRACT   BONDS. 

event,  there  is  little  chance  that  he  will  fail  to  comply 
with  his  contract,  and  the  risk  is  not  ordinarily  very 
hazardous. 

In  the  second  place,  he  may  be  the  owner  of  a  fac- 
tory which  is  producing  merchandise  like  that  required 
to  be  delivered.  In  that  event,  the  continuance  of  the 
factory  is  the  principal  consideration;  and  that  will  de- 
pend largely  upon  the  financial  standing  of  the  appli- 
cant and  the  length  of  time  intervening  before  the 
delivery  is  due. 

In  the  third  place,  the  principal,  although  not  actu- 
ally the  owner  of  the  merchandise,  may  have  an  option 
to  purchase  it  at  a  lesser  price  than  that  at  which  he 
has  agreed  to  sell  it,  so  that  the  sale  will  bring  a  profit. 
If  the  option  contract  is  with  a  responsible  party,  the 
bond  in  this  case  would  likewise  not  be  very  hazardous. 
But  if  the  principal  intends  to  purchase  the  mer- 
chandise in  the  open  market  at  the  time  delivery  is  due, 
the  transaction  is  a  speculative  one  and  the  bond  should 
not  be  signed  unless  the  principal  is  of  such  financial 
responsibility  as  to  justify  the  expectation  that  he  will 
be  able  to  stand  the  loss  in  case  the  market  for  the  com- 
modity should  rise.  The  probability  that  it  will  rise 
will  of  course  depend  upon  the  character  of  the  com- 
modity and  the  length  of  time  between  the  awarding 
of  the  contract  and  the  date  of  delivery.  Where  the 
applicant  is  in  the  habit  of  signing  contracts  for  the 
future  delivery  of  merchandise  and  taking  the  chance 
on  the  rise  of  the  market,  it  is  suggested  that  he  ought 
not  to  be  permitted  to  have  on  hand  contracts  in  excess 
of  ten  times  the  amount  of  his  net  available  resources, 


CONTRACT   BONDS.  191 

each  case  however  depending  upon  individual  circum- 
stances. 

Sec.  119. — The  Underwriting  of  Maintenance 
Bonds.  Contractors  are  sometimes  required,  not  only 
to  do  the  work  covered  by  their  contracts,  but  to  guar- 
antee the  wearing  qualities  or  efficiency  of  the  whole 
or  a  part  of  it.  The  wearing  qualities  of  streets,  roads, 
bridges,  roofs  and  the  like ;  and  the  efficiency  of  heating, 
filtering  and  other  plants  are  among  the  subjects  of 
such  guarantees.  Bonds  covering  these  maintenance 
guarantees  are,  in  their  nature,  essentially  hazardous; 
because,  in  the  first  place,  there  is  no  means  of  knowing 
that  the  road,  street,  bridge  or  roof  will  last  during  the 
stipulated  period,  or  that  the  heating  or  filtering  plant 
will  do  what  is  expected  of  it ;  and,  in  the  second  place, 
the  financial  responsibility  of  the  principal,  at  the  time 
the  bond  is  signed,  is  no  satisfactory  criterion  by  which 
to  determine  what  it  will  be  at  the  end  of  the  mainte- 
nance period ;  for  he  may  not  only  become  insolvent,  but 
may  die  and  his  estate  be  distributed  to  his  heirs,  or  he 
may  go  to  parts  unknown,  or  may  go  out  of  business 
and  dispose  of  his  property. 

Five  year  maintenance  on  street  paving  is  the  most 
frequent  subject  of  maintenance  guarantees;  and,  when 
such  bonds  are  applied  for,  the  whole  proposition  should 
be  carefully  considered,  as  such  guarantees  are  particu- 
larly hazardous,  unless  conditions  are  exactly  right,  and 
collateral  security  is  generally  necessary.  The  risk  that 
is  necessarily  involved  in  such  a  guarantee  is  great 
enough,  but  it  is  well  known  that  in  nearly  every  city 


192  CONTRACT   BONDS. 

there  are  a  number  of  contractors  who  have  sufficient 
political  influence  to  so  blind  the  city  inspectors  that 
they  will  permit  inferior  workmanship  and  the  use  of 
inferior  materials;  and  some  cities  and  towns,  particu- 
larly the  smaller  ones,  in  order  to  save  expense,  will 
sometimes  specify  an  inferior  pavement  and  neverthe- 
less expect  a  five  year  guarantee. 

In  order  to  determine  the  conditions  under  which 
pavements  may  be  expected,  with  slight  repairs,  to  last 
five  years,  and  to  determine  the  amount  that  will  be 
required  to  make  those  repairs,  it  is  not  necessary  to  be 
an  expert  paving  engineer.1  There  are  only  a  few  points 
that  need  be  considered  by  a  surety  underwriter;  and 
for  practical  purposes,  a  layman  can  pass  on  these  as 
well  as  an  engineer,  although  of  course  the  advice  of 
an  engineer  is  always  advisable.  There  are  two  cardi- 
nal rules  which  should  be  observed  in  all  cases. 

1.  No   pavement   should   be   guaranteed   for   five 
years  unless  the  bed  of  the  street  is  well  drained.     If 
the  subgrade  is  soft  or  wet,  the  pavement  will  not  stand 
under  heavy  traffic,  even  though  there  may  be  a  good 
concrete    foundation.     Maintenance    guarantees    should 
be  avoided  in  all  cases  where  the  particular  street  or 
any  considerable  portion  of  it  is  below  the  water  level 
or  where  the  subgrade  is  not  perfectly  drained. 

2.  No  pavement  should  be  guaranteed    for    five 
years  unless  it  is  to  be  laid  on  a  concrete  foundation  and 


iln  attempting  to  fix  the  conditions  upon  which  maintenance  bonds 
on  street  paving  may  be  issued,  I  have  relied  upon  the  opinions 
of  several  expert  paving  engineers  and  have  had  the  benefit  of 
certain  data  obtained  from  a  number  of  city  engineers  by  the  late 
J.  B.  Hull,  Engineer  of  the  American  Bonding  Company,  for 
which  I  am  indebted  to  Mr.  W.  B.  Wood  who  was  Mr.  Hull's  as- 
sistant and  who  succeeded  him. 


CONTRACT   BONDS.  193 

unless  the  concrete  is  to  be  six  inches  thick,  on  streets 
where  the  traffic  is  heavy  and  four  inches  where  the 
traffic  is  light.  The  usual  mixture  of  1  part  of  cement 
to  3!/2  parts  of  sand  and  7  parts  of  broken  stone  or  gravel 
is  satisfactory. 

A  dry  subgrade  and  a  good  concrete  foundation 
are  two  absolute  essentials  to  a  good  pavement ;  and  un- 
less a  pavement  is  up  to  the  standard  in  these  two  re- 
spects, it  cannot  be  expected  to  last  five  years.  If  it  is 
up  to  the  standard,  it  is  then  necessary  to  consider 
whether  or  not  the  surfacing  is  satisfactory.  The  re- 
quirements for  the  different  paving  materials  are  dif- 
ferent, so  we  must  consider  them  separately.  But  it  is  not 
necessary  to  go  into  details,  regarding  which  there  may 
be  a  difference  of  opinion  among  engineers;  it  is  neces- 
sary only  to  consider  the  particulars  wherein  a  variation 
from  standard  specifications  will  materially  affect  the 
wearing  qualities  of  the  pavement  and  will  mean  a 
noticeable  reduction  in  the  cost. 

1.  Granite  block  or  stone  block  of  standard  quality 
and  size,  if  laid  on  a  foundation  as  above  stated,  will, 
with  very  slight  repairs,  last  five  years;  and  five  cents 
per  square  yard  is  sufficient  collateral.  In  this  pave- 
ment, a  bituminous  filler  is  satisfactory. 

2.  Creosoted  wood  block,  of  standard  quality,  with 
bituminous  filler,  if  laid  on  a  foundation  as  above  speci- 
fied, will  last  five  years ;  and  five  cents  per  square  yard 
will  generally  be  sufficient  to  make  all  necessary  re- 
pairs. 

3.    A  pavement  of  vitrified  brick  is  one  which  may 


194  CONTRACT   BONDS. 

or  may  not  be  satisfactory,  depending  upon  the  charac- 
ter of  the  brick  and  of  the  filler.  In  order  to  determine 
whether  or  not  brick  of  this  kind  is  of  standard  quality, 
it  is  customary  to  subject  it  to  the  "rattler  test;"  and 
if,  in  the  test,  it  loses  more  than  from  20%  to  22%  of  its 
weight,  it  is  considered  defective.  It  has  been  found 
that  brick  which  will  not  meet  this  test  will  not  last; 
and  it  is  a  fact  that  hardly  more  than  25%  of  the  brick 
manufactured  will  meet  this  test.  The  other  is  rejected 
by  the  larger  cities  and  are  sold  to  the  smaller  cities  and 
towns  where  the  test  is  not  applied. 

In  order  to  make  a  first  class  pavement,  it  is  neces- 
sary not  only  to  use  good  brick,  but  also  to  use  ' '  grout ' ' 
filler — a  thin  mixture  of  cement,  sand  and  water.  It 
has  been  found  that  the  smaller  cities,  in  order  to  save 
expense,  sometimes  use  a  bituminous  filler,  but  it  is  not 
satisfactory.  The  following  collateral  requirements  are 
suggested : 

a.  If  the  brick  is  to  be  tested  and  grout  filler  is 
to  be  used,  five  cents  per  square  yard. 

b.  If  the  brick  is  not  to  be  tested,  ten  cents  per 
square  yard. 

c.  If  grout  filler  is  not  to  be  tested,  ten  cents  per 
square  yard. 

d.  If  neither  the  brick  is  to  be  tested  nor  grout 
filler  to  be  used,  fifteen  cents  per  square  yard. 

4.  Sheet  asphalt  may  be  of  Trinidad  or  Bermudez 
natural  or  Mexican  -or  California  refined  asphalt.  It 
should  be  laid  at  least  iy2  inches  thick  on  a  binder 
1%  inches  thick.  In  that  event,  and  if  the  foundation 
is  as  above  specified,  ten  cents  per  square  yard  will  be 


CONTRACT   BONDS.  195 

sufficient  collateral.  If  a  cheap  grade  of  asphalt  is  to 
be  used  or  if  it  is  to  be  less  than  iy2  inches,  collateral 
at  the  rate  of  25^  per  square  yard  is  necessary,  as  in 
that  event,  a  large  portion  of  the  pavement  will  have 
to  be  replaced  within  five  years. 

5.  Bitulithic  pavement  is  a  patented  article  con- 
trolled by  Warren  Brothers  Company  of  Boston;  and 
can  legally  be  laid  only  by  them  and  their  licensees. 
When  so  laid,  it  will  generally  last  five  years,  and  since 
the  indemnity  of  Warren  Brothers  Company,  which  is 
a  very  strong  concern,  is  generally  given  in  connection 
with  maintenance  guarantees  on  this  pavement,  such 
guarantees  are  considered  safe. 

6.  Asphaltic  macadam,  bituminous  macadam  and 
bituminous  concrete  are  different  names  for  the  same 
thing.     It  is  very  similar  to  Bitulithic  and  is  said  to 
be  an  infringement  of  Warren  Brothers'  patent.     How- 
ever, when  laid  in  accordance  with  the  "Topeka  Speci- 
fications" it  is  said  not  to  be  an  infringement.     This  is 
not  a  very  expensive  pavement  and  is  being  used  more 
and  more.     Some  engineers  predict  that  in  a  few  years 
it  will  be  used  more  than  any  other  pavement. 

The  wearing  qualities  of  this  pavement  cannot  be 
determined  from  the  specifications,  because  so  much 
depends  upon  the  manner  in  which  it  is  put  down 
and  it  is  so  easy  to  deceive  the  inspectors.  Collateral 
at  the  rate  of  at  least  twenty-five  cents  per  square  yard 
should  be  required. 

7.  Concrete  pavements,   whether  laid  in   a  solid 
sheet  or  in  blocks,  have  not  proven  satisfactory,  and 
they  should  not  be  guaranteed  without  full  collateral. 


196  CONTRACT   BONDS. 

This  kind  of  pavement  is  very  brittle  and  on  account  o: 
the  expansion  and  contraction,  is  apt  to  crack  and  go  to 
pieces  in  a  comparatively  short  time. 

It  is  hardly  necessary  to  add  that  macadam  pave- 
ments, whether  they  are  to  be  covered  with  oil  or  tar  or 
not,  should  not  be  guaranteed  without  full  collateral. 

Collateral  as  above  specified  has  been  found  reason- 
ably sufficient  to  make  the  repairs  that  will  be  necessary 
in  the  different  pavements  during  five  years;  and  it  is 
not  within  the  scope  of  this  book  to  say  when,  if  ever, 
these  collateral  requirements  may  be  waived.  However 
they  should  in  no  event  be  waived  except  on  stone,  gran- 
ite, wood  block,  and  vitrified  brick,  and  on  sheet  asphalt 
when  the  asphalt  is  to  be  at  least  two  inches  thick ;  and 
they  should  not  be  waived  unless  the  pavement  is  to  be  of 
the  highest  standard  above  specified,  nor  should  they  be 
waived  unless  the  applicant  is  very  strong  financially, 
has  been  in  business  for  a  number  of  years,  bears  a 
good  reputation  and  is  not  suspected  of  receiving 
"favors"  from  the  city  inspectors  in  the  shape  of  per- 
mission to  lay  an  inferior  pavement;  and  unless  the  in- 
demnity of  two  or  three  persons  worth  two  or  three 
times  the  value  of  the  work  to  be  guaranteed  is  received. 
In  the  case  of  stone,  granite  or  wood  block  or  vitrified 
brick,  the  company  furnishing  this  material  should  be 
required  to  agree  to  replace  any  that  may  be  found  dur- 
ing the  maintenance  period  to  be  defective. 

It  is  not  practicable  to  go  into  the  matter  of  main- 
tenance guarantees  in  greater  detail,  but  as  a  general 
proposition  it  may  be  said  that,  on  account  of  the  prob- 


CONTRACT   BONDS.  197 

ability  that  the  principal  will  die,  move  away,  or  be- 
come insolvent,  there  are  few  cases  where  a  surety 
company  would  be  justified,  without  collateral,  in  exe- 
cuting a  maintenance  guarantee  for  as  much  as  five 
years,  although  a  guarantee  of  one  year,  or  even  two 
years,  may  often  be  made.  All  such  guarantees  should 
be  passed  upon  by  the  company's  engineer. 

Efficiency  guarantees  are,  in  a  sense,  more  hazard- 
ous than  maintenance  guarantees,  because,  if  the  thing 
guaranteed  does  not  come  up  to  the  requirements,  it  is 
generally  necessary  to  replace  it,  so  that  the  whole 
penalty  of  the  bond  will  likely  be  consumed.  Generally, 
however,  the  liability  will  accrue  within  a  short  time 
after  the  bond  is  executed,  so  that  the  financial  standing 
of  the  applicant  is  not  likely  to  change  in  the  mean  time. 
In  this  connection,  it  may  be  well  to  call  attention  to  the 
fact  that  there  may  be  a  delay  in  testing  heating  plants, 
unless  proper  provision  is  made.  The  specifications  for 
these  plants  generally  call  for  a  certain  temperature  in 
zero  weather,  or  so  many  degrees  below  zero;  and  if 
that  temperature  is  not  reached  the  first  winter,  it  may 
be  contended,  after  the  lapse  of  several  years,  when  the 
principal  has  gone  out  of  business,  that  the  plant  does 
come  up  to  the  requirements.  It  is  therefore  advisable 
to  limit  the  guarantee  to  one  year.  This  is  not  a  hard- 
ship on  the  obligee,  as  it  can  be  determined,  on  the  basis 
of  percentages,  whether,  as  a  fact,  the  plant  will  heat 
the  building  in  colder  weather. 


CHAPTER  VI. 
DEPOSITORY  BONDS. 

Sec.  120. — Scope.  In  many  cases  where  money  is 
deposited  in  a  bank,  the  owner  requires  the  bank  to 
give  bond,  with  surety,  conditioned  for  the  safe-keeping 
of  the  money  and  for  its  prompt  return  on  due  and  legal 
demand.  Such  bonds  are  known  as  depository  bonds 
and  are  very  frequently  issued  by  surety  companies. 
The  purpose  of  this  bond  is  to  protect  the  depositor  from 
loss  in  case  the  bank  should  fail,  that  being  the  only 
way  in  which  a  proper  demand  for  the  money  is  likely 
to  be  refused;  and  the  condition  of  the  bond  is  broken 
and  liability  accrues  as  soon  as  the  bank  closes  its 
doors. 

The  great  majority  of  these  bonds  are  required  for 
the  protection  of  public  money.  In  some  cases,  the  de- 
positories are  provided  for  by  law,  and  are  designated 
by  the  constituted  authority  in  the  State,  county  or 
city,  as  the  case  may  be,  and  are  required  by  law  to 
give  bond.  In  other  cases,  officers  having  the  custody 
of  public  money,  and  being  responsible  for  its  safe  keep- 
ing, voluntarily  require  the  banks  in  which  they  keep 
the  money  to  give  bond.  These  bonds  are  often  made 
so  as  to  protect  both  the  officer  and  his  surety,  as  their 
interests  may  appear.  In  some  few  cases  however,  par- 
ticularly in  times  of  financial  stringency,  private  in- 
dividuals, firms  and  corporations  require  the  banks  in 
which  they  keep  their  money  to  give  depository  bonds. 
In  all  .such  cases,  the  bank  is  named  as  principal,  and 


DEPOSITORY  BONDS.  199 

the  bond  is  limited  to  cover  the  funds  of  a  particular 
person,  corporation  or  body  politic. 

Sec.  121.— The  Underwriting  of  Depository  Bonds. 

As  we  have  seen,  the  condition  of  a  depository  bond  is 
broken  and  liability  of  the  surety  accrues  as  soon  as 
the  bank  closes  its  doors  and  declines  to  pay  depositors. 
The  chance  of  loss  under  such  a  bond  depends  upon  the 
continued  solvency  of  the  bank;  and  the  extent  of  the 
loss  may  be  affected  by  the  character  of  the  particular 
contract  or  obligation,  in  so  far  as  it  may  affect  the  ex- 
tent of  the  surety's  right  to  participate  in  the  distribu- 
tion of  the  bank's  assets.  The  character  or  "personal- 
ity "  of  a  bank  is  made  up  of  its  financial  condition  and 
the  character  of  its  management ;  and  these  matters  will 
first  be  considered.  We  will  then  take  up  the  matter  of 
the  extent  of  the  surety's  right,  under  different  condi- 
tions, to  participate  in  the  distribution  of  the  assets. 

Sec.  122. — Financial  Condition.  The  financial  con- 
dition of  a  bank  will  depend  upon  what  is  shown  by  its 
own  statement  and  the  probability  that  that  statement 
represents  its  true  condition.  A  financial  statement  of 
a  bank  is  simply  a  summary  of  the  contents  of  its  books 
and  shows  a  balanced  account  made  up  of  " liabilities" 
on  the  one  side  and  "assets"  on  the  other.  The  liabili- 
ties are  made  up  of  capital,  surplus,  deposits,  borrowed 
money,  and  the  like;  and  the  assets  consist  of  the  cor- 
responding amount  of  cash,  or  its  equivalent,  in  the 
shape  of  investments  or  deposits  in  other  banks. 

In  analyzing  a  bank's  statement  with  a  view  of 
determining  its  strength,  the  two  things  to  be  consid- 


200  DEPOSITORY  BONDS. 

ered  are  (1)  whether  the  liabilities  are  in  the  proper 
relative  amounts,  and  (2)  whether  the  assets  are  prop- 
erly invested  and  are  worth  the  amount  for  which  they 
are  carried.  The  relation  between  the  several  items  of 
liabilities  will  first  be  considered. 

Sec.  123.— Liability— Capital  and  Surplus.  When 
a  bank  becomes  insolvent  and  closes  its  doors,  all  its 
assets,  including  the  money  paid  in  as  capital,  will  be 
used  to  pay  the  depositors ;  and,  to  that  extent,  the  capi- 
tal is  a  margin  of  safety.  But  a  surety  for  a  bank  is 
concerned  primarily  with  the  question  of  whether  the 
bank  will  continue  in  business  so  as  to  meet  the  demands 
of  its  depositors;  and,  inasmuch  as  a  bank  cannot  con- 
tinue in  business  without  a  surplus  fund,  it  is  apparent 
that  that  is  the  real  margin  of  safety;  the  chance  of  in- 
solvency being  in  inverse  proportion  to  the  size  of  the 
surplus. 

The  capital  and  surplus  are  not,  however,  to  be 
considered  in  the  absolute,  but  only  in  their  relation  to 
the  other  liabilities.  $25,000.00  will  be  an  ample  sur- 
plus for  a  bank  with  $50,000.00  of  capital  and  $250,- 
000.00  of  deposits,  but  will  be  wholly  insufficient  for  a 
bank  with  half  a  million  of  capital  and  two  million  of 
deposits.  In  the  handling  and  investment  of  large  sums 
of  money  by  a  bank,  there  are,  of  necessity,  many 
chances  of  loss  or  depreciation  of  assets — the  chance 
being  in  direct  proportion  to  the  amount  to  be  cared 
for  and  invested ;  and  unless  the  surplus  is  large  enough 
to  take  care  of  a  reasonable  loss  or  depreciation,  the 
bank  is  not  a  good  risk.  This  is  another  way  of  saying 


DEPOSITORY   BONDS.  201 

that  while  a  large  line  of  deposits  may  be  an  evidence 
of  the  confidence  of  the  public,  and  therefore  a  good 
sign,1  yet,  if  there  is  not  a  proportionate  surplus,  the 
increased  deposits  may  really  weaken  the  bank. 

It  is  not  practicable  to  lay  down  a  hard  and  fast 
rule  as  to  the  amount  of  capital  and  surplus  a  bank 
ought  to  have  to  be  reckoned  as  safe,  because  other 
things  are  to  be  considered.2  They  should,  as  we  have 
seen,  be  figured  on  the  basis  of  the  amount  of  the  de- 
posits or  on  the  total  amount  of  the  liabilities ;  and  it  is 
suggested  that  it  is  reasonable  to  require  a  bank  to  have 
a  combined  capital  and  surplus  equal  to  twelve  or 
fifteen  per  cent,  of  its  deposits,  and  a  surplus  alone 
equal  to  four  or  five  per  cent.  There  may  be  cases 
where,  by  reason  of  compensating  advantages  in  other 
directions,  a  smaller  capital  and  surplus  would  be  satis- 
factory. The  amounts  herein  mentioned  are  intended  to 
be  merely  suggestions  for  the  average  case.  But  we 
must  bear  in  mind  that,  while  an  adequate  surplus  is 
essential,  it  is  not  the  sole,  or  even  the  most  important, 
consideration  in  the  question  of  the  safety  of  a  bank. 
As  we  shall  see,  a  bank  may  be  in  a  weak,  or  even  criti- 
cal, condition  and  still  have  a  large  nominal  surplus; 
and  furthermore,  it  is  not  difficult,  by  a  comparatively 
slight  inflation  of  the  assets,  to  show  a  fictitious  surplus.3 
Therefore  while  an  adequate  surplus  is  necessary,  yet  a 
risk  should  not  be  accepted  merely  because  the  bank  has 
a  large  surplus. 


iSee  Section  124. 
2See  Sections  126-129. 
3See  Section  126. 


202  DEPOSITORY  BONDS. 

Sec.  124. — Deposits.  We  have  just  seen  that  the 
surplus  of  a  bank  ought  to  be  increased  in  proportion 
as  the  deposits  increase,  and  that  it  ought  always  to 
bear  a  certain  relation  to  the  deposits.  It  is  not  to  be 
inferred  however  that  a  large  line  of  deposits  is  an  un- 
desirable thing.  On  the  contrary,  it  is  most  desirable 
as  it  is  an  element  of  great  strength.  The  deposits  of  a 
bank  are  the  source  of  its  earnings ;  earnings  or  earning 
power  means  prosperity,  and  the  prosperous  banks 
rarely,  if  ever,  fail. 

It  has  been  found  in  practice  that  by  far  the 
largest  percentage  of  failures  is  among  the  small  banks, 
that  is,  banks  with  small  deposits,  and  that  the  percent- 
age of  salvage  received  from  them  is  smaller  than  from 
the  larger  banks.  Indeed  the  experience  of  the  com- 
panies seems  to  indicate  that,  up  to  a  certain  point,  the 
lisk  on  a  depository  bond  is  in  inverse  proportion  to  the 
amount  of  the  deposits.  As  a  rule,  a  bank  with  de- 
posits of  less  than  $60,000  should  not  be  accepted  at 
all,  as  such  a  bank  necessarily  has  a  small  margin  of 
safety  and  furthermore  is  not  likely  to  make  enough  to 
pay  its  legitimate  expenses,  such  as  rent,  salaries,  heat, 
light,  etc.,  and  may  therefore  be  compelled  to  employ 
inferior  men,  occupy  poor  quarters  and  go  backward 
instead  of  forward. 

A  large  line  of  deposits  is  not  only  a  source  of  large 
earnings,  but  it  is  an  evidence  that  the  bank  has  the 
confidence  of  business  men,  which  is  always  a  good 
sign,  as  they  may  be  assumed  to  be  familiar  with  the 
character  of  the  management.  In  this  connection  it  is 
important  to  note  the  effect  of  an  increasing  or  of  a 


DEPOSITORY  BONDS.  203 

decreasing  line  of  deposits.  A  decrease  of  deposits  is 
an  evidence  of  the  loss  of  the  confidence  of  the  public, 
which  is  so  essential  to  the  success  of  a  bank,  making 
the  possibility  of  a  "run"  the  more  imminent;  and,  it 
is  likely  to  weaken  the  bank  and  lessen  its  ability  to 
meet  the  demands  of  its  depositors  in  the  future.  This 
is  so,  because  in  order  for  the  bank  to  meet  the  with- 
drawals, it  must  have  been  necessary  for  it  to  use  its 
best  or  most  "liquid"  assets,  that  is,  the  assets  that 
were  of  unquestioned  value  and  on  which  cash  could 
be  most  easily  realized.  This  necessarily  increases  the 
proportion  of  "slow"  or  poor  assets  remaining  in  the 
hands  of  the  bank,  and  puts  the  bank  in  an  abnormal 
condition,  where  its  ability  to  get  money  to  meet  the 
further  demands  of  its  depositors  is  greatly  weakened. 
Even  a  slight  "run"  would  probably  compel  such  a 
bank  to  close  its  doors.  It  is  suggested  therefore  that 
where  a  bank's  deposits  have  been  decreasing,  great 
caution  must  be  exercised;  and  where  the  decrease  has 

been    substantial    or    continuous    the    business    should    v  V* 

VVS 
always  be  declined.    And  on  the  same  principle,  a  bank  ^     v 

whose   deposits   are   continually   increasing  is   a   good  ^ 
risk.    Indeed,  as  we  have  seen,  a  bank  whose  prosperity 
is  evidenced  by  a  large  and  increasing  line  of  deposits 
is  likely  to  be  in  a  flourishing  condition  and  perfectly 
safe  for  depositors. 

Sec.  125. — Borrowed  Money.  It  is  considered  en- 
tirely proper  for  a  bank,  at  certain  seasons  of  the  year, 
when  its  customers  are  in  need  of  large  amounts  of  money 
for  crop-moving  or  other  legitimate  purposes,  to  borrow  a 
reasonable  amount  of  money  in  order  to  meet  their 


204  DEPOSITORY  BONDS. 

needs.  But  it  is  not  considered  legitimate  banking  to 
make  a  regular  practice  of  doing  business  on  borrowed 
capital,  making  a  profit  out  of  the  difference  between 
the  rate  at  which  the  money  can  be  loaned  and  that  at 
which  it  can  be  borrowed.  The  money  is  usually  bor- 
rowed on  short  time,  and  is  often  loaned  on  longer  time ; 
and  there  is  always  a  possibility  that,  by  reason  of 
changed  financial  conditions,  or  for  other  reasons,  the 
bank  from  which  the  money  was  borrowed  may  decline 
to  renew  the  loan.  It  may  be  impossible  to  get  the 
money  elsewhere;  and  the  borrowing  bank,  having 
loaned  out  the  money,  may  not  be  able  to  get  it  back  in 
time  to  repay  the  loan,  and  may  thereby  be  forced  to 
close  its  doors.  It  puts  a  bank  at  the  mercy  of  the 
bank  or  banks  from  which  the  money  is  borrowed,  and 
is  a  very  dangerous  practice. 

The  national  banking  act  permits  a  national  bank 
to  borrow  an  amount  equal  to  its  capital ;  and,  as  a  rule, 
no  bank,  whatever  may  be  the  law  in  the  particular 
state,  ought  to  borrow  more  than  that.  And  a  bank 
with  a  small  surplus,  as  compared  with  capital,  ought 
not  to  borrow  that  much;  although,  on  the  other  hand, 
it  would  probably  be  safe  for  a  bank  with  a  large  sur- 
plus in  proportion  to  capital  to  borrow  more.  Perhaps 
&  better  general  rule  would  be  to  say  that  a  bank  ought 
not  to  borrow  more  than  one-half  its  combined  capital 

and  surplus. 

However,  the  amount  of  borrowed  money,  at  any 
particular  time,  is  not  necessarily  the  true  test.  It  is 
equally  as  important  to  determine  that  the  money  is 
borrowed  for  the  purpose  of  meeting  a  temporary  de- 


DEPOSITORY  BONDS.  205 

mand  of  customers  and  that  it  is  not  a  continuing  prac- 
tice. Banks  should  not  be  under  "bills  payable/7  as 
borrowed  money  is  generally  designated,  for  longer  than 
from  four  to  six  months  of  the  year.  It  is  therefore 
not  enough  to  examine  a  single  statement  of  a  bank, 
but  its  statements  for  at  least  a  year  should  be  ex- 
amined so  as  to  determine  its  practice  with  respect  to 
borrowing  money.  It  is  suggested  that  a  bank  which 
has  bills  payable  and  rediscounts  for  more  than  an 
amount  equal  to  one-half  the  combined  capital  and  sur- 
plus, or  which  is  in  the  habit  of  being  under  ' l  bills  pay- 
able "  for  longer  than  four  or  five  months  of  the  year,  ' 
is  an  undesirable  risk. 

In  this  connection,  attention  is  called  to  a  method 
which  some  banks  have  of  attempting  to  conceal  the 
amount  they  have  borrowed  by  carrying  it  as  "certifi- 
cates of  deposit "  When  they  borrow  money,  instead 
of  giving  a  note,  as  is  the  regular  practice,  they  give  a 
certificate  of  deposit,  payable  at  the  date  of  the  maturity 
of  the  loan.  If,  therefore,  a  statement  shows  a  large 
amount  of  "certificates  of  deposit, "  it  may  be  assumed, 
unless  the  contrary  is  shown,  that  this  represents  bor- 
rowed money.  In  the  sworn  statements,  which  banks 
in  most'  of  the  states  are  required  to  make  to  the  state 
banking  department,  it  is  generally  necessary  to  state 
what,  if  any,  "certificates  of  deposit"  are  for  borrowed 
money ;  and  if  such  statements  are  available,  definite  in- 
formation can  generally  be  obtained. 

Sec.  126.— The  Assets.  Having  ascertained  that 
the  several  liabilities  are  in  the  proper  relative  propor- 
tions, it  is  next  in  order  to  determine  as  far  as  possible, 


206  DEPOSITORY  BONDS. 

whether  or  not  the  assets  are  properly  invested  and 
worth  the  amount  for  which  they  are  carried.  It  is 
well  known  that  worthless  paper  is  often  carried  as  a 
good  asset  and  that  the  assets  are  otherwise  inflated; 
and  just  to  the  extent  that  the  assets  are  inflated,  the  sur- 
plus, as  shown  by  the  statement,  will  be  false.  In  other 
words,  every  dollar  of  false  or  fictitious  value  in  the 
statement  of  assets  will  be  reflected  in  the  surplus.1 
Where  the  surplus  is  small  or  near  the  danger  line,  it 
is  important  to  note  the  item  of  "  furniture  and  fix- 
tures," as  this  item  is  frequently  inflated  in  order  to 
create  a  surplus.  In  such  cases,  this  item  should  be 
ignored  and  the  surplus  reduced  accordingly. 

It  is  not  practicable  for  a  surety  company  to  make 
a  special  examination  of  the  affairs  of  the  banks  that 
apply  for  depository  bonds,  so  there  is  no  way  to  abso- 
lutely determine  whether  the  assets  are  what  they  seem. 
About  the  only  light  that  can  be  thrown  on  this  sub- 
ject is  by  an  examination  of  the  report  of  the  last  audit 
of  the  state  or  national  bank  examiner,  and  by  a  con- 
sideration of  the  reputation  and  standing  of  the  officers 
in  so  far  as  it  may  affect  the  probability  that  they 
would  knowingly  inflate  the  statement  of  the  assets.2 
Having  regard  to  the  proper  investment  of  the  assets 
there  are  one  or  two  points  which  will  be  considered  in 
some  detail  in  the  following  sections. 

Sec.  127.— Convertibility  of  Assets  into  Cash.  It 
is  not  enough  that  the  assets  of  a  bank  be  safely  in- 
vested. They  must  be  so  invested  that  they  can  be  con- 


iSee  Section  123. 
2 See  Section  129. 


DEPOSITORY  BONDS.  207 

verted  into  cash  in  time  to  meet  any  probable  demand 
of  the  depositors.  The  ever-present  danger  of  unusual 
withdrawals  should  always  be  provided  for.  Many 
banks,  otherwise  perfectly  good,  have  been  compelled 
to  close  their  doors  because  their  assets  were  not  such 
as  could  readily  be  converted  into  money.  Real  estate 
and  mortgage  loans  are  recognized  as  "slow"  assets, 
that  is  to  say,  assets  which  cannot  easily  be  converted 
into  money.  Savings  banks  generally  have  the  right,  in 
emergencies,  to  require  their  depositors  to  give  30  or  60 
days  notice  of  their  intention  to  withdraw  their  de- 
posits, so  that  it  is  not  so  necessary  for  such  banks  to 
have  all  their  assets  in  a  form  to  be  immediately  con- 
vertible into  cash;  and  it  is  generally  deemed  prudent 
for  such  banks  to  keep  as  much  as  50%  of  their  deposits  xj 
invested  in  real  estate  and  mortgage  loans.  On  the 
other  hand,  commercial  banks  are  likely  to  be  called  on 

at  any  time  by  their  depositors,   and  they  must  pay 

^ 
immediately  or  close  their  doors.   Hence  the  importance 

of  having  a  large  percentage  of  "quick"  assets.  It  is 
not  generally  considered  prudent  for  such  banks  to  in- 
vest more  than  20%  of  their  deposits  in  real  estate  and 
mortgage  loans  combined;  and  where  a  larger  percent- 
age is  so  invested,  the  risk  should  be  declined. 

Sec.  128.— Cash  Reserve.  Just  as  a  bank  is  not 
safe  unless  it  has  a  fair  portion  of  its  deposits  invested 
in  "quick"  assets,  so  is  it  not  safe  unless  it  has  a  fair 
amount  of  available  cash.  As  we  have  seen,  a  bank  must 
always  be  in  a  position  to  meet  the  probable  demands  of 
its  depositors;  and  for  that  purpose,  cash  on  hand  or 
in  other  banks  is  necessary.  National  banks  are  re- 


208  DEPOSITORY  BONDS. 

quired  by  law  to  carry  25%  of  their  deposits  in  cash 
as  a  reserve  although  they  are  permitted  to  deposit  a 
part  of  this  in  "reserve  banks"  or  "central  reserve 
bank"  in  the  larger  cities.  Many  of  the  states  also  re- 
quire the  banks  incorporated  by  them  to  carry  a  cash 
reserve,  but  other  states  do  not.  However,  experience 
has  shown  that  it  is  not  safe  for  a  bank  to  carry  a 
smaller  reserve  than  15%  of  its  deposits;  and  a  bank 
which  habitually  or  even  occasionally,  permits  its  re- 
serve to  get  below  that  amount,  is  not  a  good  risk. 

Sec.  129. — Character  of  the  Management.  Al- 
though the  liabilities  of  a  bank  may  seem  to  be  in  the 
proper  relative  proportion,  and  although  the  assets  may 
seem  to  be  properly  invested,  and  worth  the  amount  for 
which  they  are  carried,  yet  the  management  of  the 
bank  may  be  such  as  to  make  it  an  undesirable  risk. 
There  are  some  banks  which  are  ultra-conservative,  mak- 
ing only  high  grade  investments  and  loans  only  on  gilt 
edge  security,  and  making  no  loans  to  officers  or  em- 
ployees, and  none  in  excess  of  the  limit  prescribed  by 
law.  Such  banks  are,  of  course,  the  best  risks.  Other 

banks   are  managed   by   speculators,  who,  in   order   to 

v5 
build  up  the  business  of  the  bank,  grant  unwarranted 

accommodations  to  depositors,  such  as  paying  excessive 
rates  of  interest  and  making  loans  on  doubtful  security. 
Such  banks  often  succeed  in  getting  a  large  amount  of 
deposits,  but  if  these  deposits  have  been  ' '  bought ' '  with 
undue  accommodations,  the  bank  is  likely  eventually  to 
come  to  grief.  Still  other  banks  are  managed  by  dis- 
honest men  who  are  in  the  habit  of  making  loans  to 
themselves,  or  to  firms  or  corporations  in  which  they 


DEPOSITORY  BONDS.  209 

are  largely  interested,  without  requiring  adequate  col- 
lateral; and  to  the  extent  that  the  collateral  is  inade- 
quate, the  surplus  of  the  bank  is  fictitious. 

As  we  have  seen,  it  is  not  practicable  to  make  an 
examination  of  the  affairs  of  banks  which  apply  for  de- 
pository bonds  for  the  purpose  of  determining  the  char- 
acter of  their  loans  and  investments.  However,  the 
character  of  a  bank  in  this  respect  is  generally  known, 
to  a  greater  or  less  extent,  in  the  community  in  which 
it  operates;  and  it  is  not  only  important  but  also  the 
duty  of  an  agent  of  a  surety  company  to  make  himself 
conversant  with  the  local  conditions  in  banking  and 
business  circles  in  order  that  he  may  act  intelligently  on 
applications  for  these  bonds.  I  do  not  believe  enough 
attention  is  paid  to  the  investigation  of  the  management 
of  banks  applying  for  depository  bonds.  This  is  very 
important ;  for,  as  we  have  seen,  it  is  not  difficult  for  a 
bank,  by  inflating  its  assets,  to  show  sufficient  surplus 
when  it  is  practically  insolvent.  Indeed,  nearly  every 
bank  that  fails  has  an  adequate  nominal  surplus.  If 
the  management  of  the  bank  is  not  such  as  to  warrant 
the  belief  that  its  financial  statement  is  dependable,  the 
application  should  be  declined. 

Sec.  130.— The  Character  of  the  Contract.  In  gen- 
eral. Having  determined  that  the  particular  bank  is 
in  a  sound  condition  and  reasonably  safe  for  ordinary 
depositors,  it  is  next  in  order  to  consider  how  the  liabil- 
ity of  the  surety  will  be  affected  by  the  particular  obli- 
gation for  which  application  has  been  made ;  and  whether 
or  not,  under  the  circumstances,  the  surety  is  justified 
in  taking  the  risk.  The  liability  of  the  surety,  as  it 


210  DEPOSITORY  BONDS. 

may  be  affected  by  different  conditions,  will  now  be  con- 
sidered. 

Sec.  131.— Liability— As  Affected  by  Right  to 
Salvage.  In  practice,  insolvent  banks  always  have 
some  money  to  distribute  to  their  depositors;  and  a 
surety,  who  pays  one  of  the  depositors,  is  generally  en- 
titled to  receive  that  depositors  distributive  share.  The 
amount  of  the  surety's  ultimate  liability  may  therefore 
be  materially  affected  by  the  extent  of  its  right  to  share 
in  this  distribution.  This  matter  is  presented  in  three 
aspects. 

In  the  first  place,  the  particular  depositor,  who  is 
the  obligee  in  the  bond,  may  be  a  preferred  creditor,  and 
entitled  to  receive  the  entire  amount  of  his  deposit  be- 
fore anything  is  paid  to  ordinary  depositors.  In 
some  of  the  states,  such  is  the  law  with  respect  to 
deposits  of  the  funds  of  the  state  itself;  and  in  a  few 
of  the  states,  the  same  rule  applies  to  funds  of  counties 
and  cities.  Where  such  is  the  law,  it  is  fairly  safe  to 
assume  that  a  surety  on  a  bond  covering  such  a  deposit, 
being  entitled,  upon  payment,  to  all  the  obligee's  rights 
against  the  bank,  will  not  sustain  an  ultimate  loss;  be- 
cause practically  all  insolvent  banks  have  enough  to  pay 
preferred  depositors  in  full.  It  is,  however,  not  neces- 
sarily good  policy  to  issue  these  bonds  indiscriminately, 
because,  in  the  first  place,  the  failure  of  the  bank  will,  if 
the  surety  lives  up  to  his  obligation,  mean  an  outlay, 
for  several  months  perhaps,  of  the  amount  of  the  de- 
posit; and,  in  the  second  place,  it  generally  means  the 
incurring  of  some  expense.  However,  a  comparatively 
small  volume  of  such  business  will  take  care  of  the  in- 


DEPOSITORY  BONDS.  211 

terest  and  expense ;  and,  where  the  right  to  a  preference 
is  undoubted,  a  surety  company  can  afford  to  be  fairly 
liberal. 

In  the  second  place,  there  is  the  case  where  the 
obligee  in  the  bond  is  an  ordinary  depositor  and  entitled 
to  share  with  other  depositors  in  the  distribution  of  the 
bank's  assets.  In  that  event,  the  surety  will  ordinarily 
receive  the  full  dividend  rate  on  the  amount  paid  by 
him. 

But,  in  the  third  place,  we  have  the  case  where  the 
deposit  exceeds  the  amount  of  the  bond,  or  exceeds  the 
amount  of  all  valid  and  enforcible  bonds  covering  it, 
and  where  the  depositor,  notwithstanding  payment  by 
the  surety  of  the  full  amount  of  the  bond,  has  a  right  to 
have  the  balance  of  his  deposit  fully  repaid  out  of  the 
bank's  assets  before  the  surety  is  entitled  to  anything. 
In  cases  of  private  contract,  a  surety  company  usually 
makes  it  a  condition  of  its  obligation  that  it  shall 
be  entitled  to  the  dividends  on  the  amount  paid  by  it, 
whether  the  obligee  shall  have  been  fully  reimbursed  or 
not.  But  in  cases  where  the  bond  is  provided  for  by 
law,  and  where  the  condition  of  the  bond  is  fixed  by  the 
statute,  such  a  provision  would  probably  be  declared 
void  by  the  courts  and  is  not  generally  inserted.  In 
such  cases  the  surety  is  subjected  to  an  extraordinary 
hazard  in  that  he  may  be  deprived  of  all  or  a  part  of  the 
dividends  to  which  he  would  ordinarily  be  entitled.  The 
ultimate  loss,  in  case  the  bank  fails,  is  increased  just 
in  proportion  as  the  amount  of  the  deposit  exceeds  the 
amount  of  the  bond,  or  exceeds  the  total  amount  of  all 
valid  and  enforcible  bonds  and  securities  covering  the 


212  DEPOSITORY  BONDS. 

deposit.  It  is  therefore  the  duty  of  a  surety  under- 
writer to  see,  in  such  cases,  that  bonds  and  securities, 
equal  to  the  largest  amount  likely  to  be  on  deposit  at 
any  one  time  are  carried ;  and  if  they  are  not  to  be  car- 
ried, the  bond  should  be  written  only  for  large  banks 
which  are  in  absolutely  first-class  condition. 

Sec.  132.— Liability— As  Affected  by  the  Right  to 
Cancel  the  Bond.  In  some  of  the  cases  where  deposi- 
tory bonds  are  required  by  law,  the  statute  makes  pro- 
vision by  which  the  surety  may  terminate  its  liability  by 
giving  notice  to  the  person  authorized  to  withdraw  the 
deposit.1  And  in  cases  of  private  contract,  where  the 
bond  is  not  given  in  pursuance  of  any  statute,  the  bond 
itself  usually  contains  a  provision  by  which  the  surety 
may  terminate  the  liability  by  giving  notice  to  the 
obligee.  It  is  not  generally  believed  that  the  surety 
on  a  depository  bond  may  terminate  the  liability  in  the 
absence  of  any  law  authorizing  it,  or  in  the  absence  of 
any  valid  provision  in  the  bond,  although  there  seems 
to  be  a  contrary  opinion.2  However,  in  the  absence  of 
a  definite  settlement  of  this  question  by  the  courts,  it  is 


iGEORGIA. — Governor  has  authority,  in  his  discretion,  upon  peti- 
tion of  the  surety,  to  release  surety  for  State  depositories.  Code,  Sec. 
1255. 

MISSOURI. — The  court  authorized  to  approve  the  bond  of  any  de- 
pository may,  in  its  discretion,  release  the  surety  upon  its  petition. 
Rev.  Stat.,  1909,  Sees.  11281-88. 

OHIO. — Bond  of  County  depositories  may  be  cancelled  upon  ten 
days'  written  notice  to  the  County  Commissioners,  the  County  Audi- 
tor and  County  Treasurer,  provided  the  money  on  deposit  is  with- 
drawn or  a  new  bond  furnished.  Page  and  Adams  Code,  Sec.  2724. 

VIRGINIA. — Bond  of  depository  for  the  State  funds  may  be  can- 
celled upon  petition  to  the  Governor  and  upon  reasonable  notice  to- 
the  depository.  Pollard's  Code  of  1904,  Sees.  2888-89. 

WISCONSIN. — Board  of  deposit  is  authorized  to  cancel  the  bond 
of  any  State  depository,  but  no  method  is  provided  by  which  the 
surety  may  start  the  proceedings.  Wisconsin  Statutes,  1911,  Sec. 
160-b. 

2ln  this  connection  see  an  article  by  the  author  of  this  book  in. 
the  American  Law  Review  for  November — December,  1908. 


DEPOSITORY  BONDS.  213 

suggested  that  it  is  not  safe  to  assume  that  the  right  does 
exist. 

The  right  to  cancel  the  bond  by  notice  to  the 
obligee  is  a  most  valuable  right  and  materially  reduces 
the  real  hazard  involved;  for,  in  many  cases,  a  vigilant 
agent  of  a  surety  company  will  learn  of  the  weakened 
condition  of  a  bank,  on  which  his  company  is  carrying 
a  depository  liability,  and  of  its  probable  failure,  in 
time  to  cancel  before  the  crash  comes.  And  in  time  of 
financial  stringency,  which  seem  periodically  to  occur 
in  this  country,  banks  which  would  ordinarily  be  good, 
are  sometimes  unable  to  get  money  to  meet  the  demands 
of  their  depositors  and  are  compelled  to  close  their 
doors.  These  bonds  can  be  issued  with  much  more  lib- 
erality where  it  is  known  that,  if  a  financial  crisis  does 
come,  or  if  the  guaranteed  banks  do  grow  weak,  the 
bonds  may  be  cancelled.  Bonds  which  will  continue  in 
force  for  more  than  one  year  and  which  cannot  be  termi- 
nated at  the  will  of  the  surety  should  be  issued  only  for 
the  comparatively  few  large  banks  which  are  in  abso- 
lutely first-class  condition  and  about  which  there  is  no 
question. 

Sec.  133.— The  Amount  of  Liability.  Having  as- 
certained that  the  bank  in  question  is  a  reasonably  safe 
institution  and  an  acceptable  risk,  and  that  there  is 
nothing  in  the  particular  obligation  to  make  it  unac- 
ceptable, it  is  next  in  order  to  determine  the  maximum 
amount  of  liability  to  be  taken,  for  there  must  be  a 
limit  somewhere.  We  have  seen  that  where  a  bank  has 
deposits  of  less  than  $60,000,  it  is  an  undesirable  risk. 
But  if  the  deposits  are  in  excess  of  $60,000,  a  liability 


214  DEPOSITORY  BONDS. 

in  proportion  to  the  size  and  strength  of  the  bank  may 
be  taken. 

In  determining  the  amount  of  liability  that  may 
be  taken,  it  is  necessary  first  to  establish  a  basis  upon 
which  the  amount  is  to  be  calculated.  Some  under- 
writers take  the  aggregate  capital  and  surplus  as  the 
basis  and  fix  25%  as  the  maximum  amount  of  liability 
to  be  taken.  As  we  have  seen  however,  the  amount  of  the 
deposits  is  a  very  important  factor  in  determining  the 
probability  that  a  bank  will  continue  in  business.  There- 
fore other  underwriters  take  the  total  of  the  capital, 
surplus  and  deposits  as  the  basis,  and  fix  5%  as  the 
maximum  liability. 

It  is  impossible  to  formulate  a  rule  that  will  do  for 
all  surety  companies,  because  large  companies  can  afford 
to  take  a  greater  liability  than  small  companies.  But 
it  is  suggested  that  for  a  company  with  an  underwrit- 
ing capacity  of  $250,000  or  over,  it  would  be  reasonably 
safe  to  take  a  total  liability  equal  to  25%  of  the  capital 
and  surplus,  or  5%  of  the  capital,  surplus  and  deposits. 
Whether  the  one  or  the  other  basis  is  used,  smaller  com- 
panies should,  of  course,  take  a  smaller  percentage  in 
proportion  to  their  size.  And  it  is  to  be  borne  in  mind 
that  this  percentage  will  be  increased  or  decreased  as 
the  bank  may  seem  in  other  respects  to  be  strong  or 
weak;  and,  in  each  case,  all  the  possible  elements  of 
weakness  and  strength,  as  above  outlined,  should  be 
taken  into  consideration  in  determining  the  amount  of 
liability,  as  well  as  in  determining  whether  or  not  the 
risk  should  be  taken  at  all. 


CHAPTER  VII. 
INDEMNITY  ON  LOST  INSTRUMENTS. 

Sec.  134. — Scope.  It  sometimes  happens  that  when 
a  bond,  note,  certificate  of  deposit,  certificate  of  stock, 
insurance  policy  or  other  similar  obligation  for  the  pay- 
ment of  money,  becomes  due,  the  person  to  whom  it  was 
issued  claims  that  it  has  been  lost,  stolen  or  destroyed, 
and  therefore  that  he  cannot  produce  it.  If  the  maker 
of  the  instrument  should  under  the  circumstances  pay 
it,  he  would  run  a  two-fold  risk.  In  the  first  place,  the 
instrument  may  not  really  have  been  lost,  stolen  or 
destroyed,  as  alleged,  but  may  have  been  sold  or  as- 
signed to  a  third  person.  In  the  second  place,  if  it  has 
been  lost  or  stolen,  and  not  actually  destroyed,  it  may 
get  into  the,  hands  of  a  person  who  will  be  entitled  to 
it  as  against  the  true  owner,  who  lost  it.  Accordingly, 
the  maker  of  the  instrument,  as  a  condition  precedent 
to  paying  it,  or  issuing  a  duplicate,  may  require  that 
a  bond  be  given  to  indemnify  him  against  loss  in  con- 
sequence of  so  doing.  Surety  companies  are  frequently 
asked  to  issue  such  bonds;  and  they  form  one  of  the 
more  important  of  the  minor  classes  of  surety  bonds. 

Sec.  135.— Liability.  The  maker  of  the  instrument 
generally  requires  such  a  bond  as  will  obligate  the 
principal  and  surety  not  only  to  reimburse  him  in  event 
he  is  required  to  pay  the  obligation  a  second  time,  but 
also  to  pay  all  incidental  costs,  expenses  and  counsel 
fees.  Indeed,  in  many  cases,  the  principal  purpose  of 
the  bond  is  to  guard  against  possible  expense.  And  in 


216  INDEMNITY  ON  LOST  INSTRUMENTS. 

view  of  the  well  known  fact  that  people  do  make  claims 
and  bring  suits  that  have  no  merit  in  law,  it  is  apparent 
that  a  loss  may  be  sustained,  notwithstanding  the  in- 
strument may  be  of  such  a  nature  that,  under  the  cir- 
cumstances, a  third  person  could  have  no  legal  title 
to  it  as  against  the  principal. 

Sec.  136.— The  Risk.  In  general.  The  desirabil- 
ity of  such  a  risk  is  of  course  largely  affected  by  the 
financial  strength  of  the  principal ;  for  it  is  true  in  this 
case,  as  in  all  other  cases  of  suretyship,  that  the  princi- 
pal stands  between  the  surety  and  loss.  But  the  object 
of  this  work  is  to  point  out  the  risk  peculiar  to  the  dif- 
ferent bonds;  it  being  the  prerogative  of  each  under- 
writer to  say  how  much  financial  strength  an  appli- 
cant ought  to  have  to  justify  a  surety  company  in  tak- 
ing that  risk.1  The  risk  under  these  bonds  will  there- 
fore be  considered  from  the  standpoint  of  the  personal- 
ity of  the  applicant,  in  so  far  as  it  may  affect  the  ques- 
tion of  his  veracity;  and  the  nature  and  condition  of 
the  lost  instrument,  in  so  far  as  it  may  affect  the  prob- 
ability that  it  will  find  its  way  into  the  hands  of  a  per- 
son who  will  be  entitled  to  recover  on  it,  notwithstand- 
ing the  issuance  of  the  duplicate,  or  the  payment  of  the 
money,  to  the  principal. 

Sec.  137.— Risk— as  Affected  by  the  Personality  of 
the  Applicant.  As  will  be  more  fully  explained  in  the 
succeeding  paragraphs,  a  surety  underwriter,  in  pass- 
ing on  an  application  for  a  bond  of  this  kind,  ought 
to  know,  first,  that  the  instrument  has  in  fact  been  lost, 


iSee  however  Sections  76  and  151. 


INDEMNITY  ON  LOST  INSTRUMENTS.  217 

stolen  or  destroyed,  and  not  assigned  or  transferred  to  a 
third  person;  and,  second,  he  ought  to  know  the  nature 
and  character  of  the  instrument  and  the  circumstances 
under  which  it  disappeared.  In  many  cases,  the  only  way 
of  getting  any  information  as  to  these  material  facts 
is  through  the  applicant.  His  affidavit  ought  to  be  re- 
quired in  all  cases ;  and  it  is  important  to  make  such  an 
investigation  of  his  character  and  standing  as  will  be 
sufficient  to  show  that  reliance  can  be  placed  on  his 
word.  It  is  hardly  necessary  to  add  that  the  statements 
of  the  applicant  ought  to  be  verified  as  far  as  may  be 
possible. 

Sec.  138.— Risk— As  Affected  by  the  Probable  De- 
struction of  the  Instrument.  If  the  instrument  has 
in  fact  been  destroyed,  as  for  example,  by  fire,  and  not 
merely  lost,  mislaid  or  stolen;  and  if,  at  the  time  of  its 
destruction,  it  belonged  to  the  applicant,  there  is  of 
course  practically  no  risk  on  the  bond.  While  it  is 
hardly  possible  to  become  absolutely  sure  of  the  destruc- 
tion of  the  instrument  and  the  title  of  the  applicant, 
yet  if  the  applicant  is  a  person  of  good  standing  and 
reputation,  and  makes  affidavit  to  facts  which  show,  to 
a  practical  certainty,  the  destruction  of  the  instrument, 
and  further  makes  oath  that  he  was  the  owner  of  the  in- 
strument and  that  he  had  not  endorsed,  transferred  or 
assigned  it,  it  is  perhaps  reasonably  safe  to  assume  that 
what  he  says  is  true.  However  each  case  will  have  to 
be  governed  by  its  own  particular  circumstances,  for  it 
cannot  be  said  in  advance  what  evidence  of  ownership 
and  destruction  ought  to  be  accepted.  The  point  to  be 
emphasized  is  the  distinction  between  a  case  where  the 


218  INDEMNITY  ON  LOST  INSTRUMENTS. 

evidence  shows  to  a  practical  certainty  that  the  original 
instrument  is  not  in  existence,  and  a  case  where  the  in- 
strument is  merely  lost,  mislaid  or  stolen,  and  may  be 
in  the  hands  of  one  who  can  recover  on  it  or  who  may 
have  reasonable  grounds  to  believe  and  contend  that  he 
can  recover.  In  the  first  case,  the  bond  may  be  executed 
almost  regardless  of  the  financial  standing  of  the  prin- 
cipal, so  long  as  his  moral  standing  is  good  enough  to 
justify  a  belief  that  his  statements  and  affidavit  are 
true.  In  the  second  case,  it  ought  to  be  assumed  that 
the  instrument  is  in  the  hands  of  a  third  person;  and 
the  desirability  of  the  risk  should  be  tested  by  the  ques- 
tion whether  or  not  such  third  person  could  probably 
recover  on  it.  This  question  will  next  be  considered. 

Sec.  139.— Risk— As  Affected  by  the  Character  of 
the  Instrument.  The  question  whether  or  not  the 
holder  of  an  instrument  that  has  been  lost  or  stolen 
can  recover  on  it  is  a  difficult  legal  question  which  is 
beyond  the  scope  of  this  work;  but  it  is  possible  to 
point  out  certain  principles  which  have  an  important 
bearing  on  the  risk  of  the  surety. 

In  the  first  place,  it  may  be  said  to  be  a  general 
rule  of  law  that  in  order  for  one  to  become  a  "bona  fide 
holder  for  value"  of  a  lost  instrument  (or  a  "holder 
in  due  course,"  as  he  is  sometimes  called)  so  as  to 
entitle  him  to  recover  as  against  the  true  owner,  he  must, 
among  other  things,  have  purchased  the  instrument  be- 
fore maturity.  If  therefore,  the  particular  instrument 
was  lost  after  maturity,  or  if,  though  lost  before  matur- 
ity, a  considerable  time  has  elapsed  since  maturity  and 
no  demand  has  been  made,  it  may  be  fair  to  assume  that 


INDEMNITY  ON  LOST  INSTRUMENTS.  219 

no  demand  will  be  made,  or  if  made,  that  it  will  not  pre- 
vail. 

In  the  second  place,  in  order  for  the  holder  to  be 
considered  a  "holder  in  due  course,"  he  must  not  only 
have  paid  value  for  the  instrument,  but  he  must  have 
received  it  in  good  faith,  without  knowledge,  express 
or  implied,  that  it  was  lost  or  stolen.  It  is  needless 
to  say  therefore  that  the  finder  or  thief  could  not  re- 
cover as  against  the  true  owner;  nor  could  one  who 
was  actually  or  impliedly  in  collusion  with  the  finder 
or  thief  recover.  The  instrument  must  have  been  trans- 
ferred to  an  innocent  third  person  for  value.  The  risk 
therefore  will  be  affected  largely  by  the  ease  or  difficulty 
with  which  the  instrument  could  probably  be  thus  trans- 
ferred. 

In  considering  this  question,  it  will  be  convenient 
to  divide  the  instruments  into  three  classes.  First  we 
have  those  instruments  which  are  transferable  by  mere 
delivery  without  any  endorsement,  such  as  mortgage 
bonds  and  notes,  certificates  of  deposit,  etc.,  payable  to 
bearer;  or  instruments  which,  though  payable  to  the 
order  of  a  particular  person,  have  been  endorsed  by  him 
in  blank.  If  such  an  instrument  were  offered  for  sale, 
the  suspicions  of  a  prospective  purchaser  would  ordi- 
narily not  be  aroused  and  a  sale  could  probably  be  made. 
This  is  the  most  dangerous  class ;  and,  unless  such  an  in- 
strument has  undoubtedly  been  destroyed,  or  has  long^ 
since  matured,  it  is  not  a  legitimate  surety  risk. 

In  the  second  class,  we  have  those  instruments  whichr 
though  transferable  by  endorsement,  have  not  been  en- 
dorsed by  the  payee;  and  where,  in  order  to  negotiate 


220  INDEMNITY  ON  LOST  INSTRUMENTS. 

them,  the  signature  of  the  payee  would  have  to  be  forged. 
Under  the  uniform  * '  negotiable  instruments  law ' 7  which 
.is  in  force  in  many  of  the  states,  a  forged  signature  is 
wholly  inoperative  to  pass  title  to  a  negotiable  instru- 
ment, and  no  right  to  enforce  payment  against  any  party 
thereto  can  be  acquired  through  or  under  such  signature. 
If  that  is  the  law  in  the  particular  state  with  respect  to 
the  particular  instrument,  and  that  instrument  has  not 
been  endorsed  by  the  true  owner,  then  it  is  practically 
certain  that  no  third  person  can  acquire  a  title  that  will 
be  good  as  against  the  true  owner. 

The  third  case  is  that  where  the  instrument  is  not, 
strictly  speaking,  a  " negotiable  instrument,"  in  the 
sense  that  it  may  be  transferred  by  endorsement  or  mere 
delivery,  but  where  an  assignment  is  necessary;  as  for 
example,  an  insurance  policy.  It  is  hardly  possible, 
under  any  circumstances,  to  pass  title  to  such  an  instru- 
ment by  a  forged  assignment ;  and  if  the  instrument  has 
not  been  assigned,  there  is  practically  no  chance  that  a 
claim  could  successfully  be  made  by  a  third  person.  The 
contingency  that  insurance  companies  really  intend  to 
guard  against  is  the  possibility  that  the  insured  may  in 
fact  have  assigned  the  policy.  Reference  has  already 
been  made  to  the  importance  of  ascertaining  the  gen- 
uineness of  the  loss. 

Sec.  140. — Summary.  The  substance  of  this  chap- 
ter may  be  summarized  as  follows:  (1)  Where  the  in- 
strument actually  has  been  destroyed,  and  was,  at  the 
time  of  its  destruction,  the  property  of  the  applicant, 
there  is  little,  if  any,  danger  of  loss.  (2)  Where  the 
instrument  is  transferable  by  more  delivery,  and  is  not 


INDEMNITY  ON  LOST  INSTRUMENTS.  221 

known  to  have  been  destroyed,  the  risk  is  hazardous, 
until  a  considerable  time  has  elapsed  after  maturity, 
(3)  Where  the  instrument  is  transferable  only  by  en- 
dorsement, and  has  not  been  endorsed,  there  is  generally 
not  much  danger,  particularly  if  the  instrument  has 
matured.  But  where  the  "negotiable  instrument  law'7 
is  not  effective,  the  law  as  to  the  effect  of  a  forged  signa- 
ture may  be  different.  (4)  Where  the  instrument  m 
not  negotiable,  but  is  transferable  only  by  assignment 
and  has  not  been  assigned,  there  is  little  chance  of  loss 
in  any  state. 

The  foregoing  propositions  depend  upon  the  accur- 
acy of  information  which  can  often  be  obtained  only 
from  the  applicant;  hence  the  importance  of  investi- 
gating his  character  and  standing. 


CHAPTER  VIII. 

BOND    ON    ASSIGNMENT    OF   ACCOUNTS    RE- 
CEIVABLE. 

Sec.  141. — Scope.  It  sometimes  happens  that  a 
merchant,  who  does  a  large  business,  feels  that  if  he  had 
the  use  of  the  money  that  is  due  him,  he  could  use  it  to 
advantage  in  his  business  and  make  a  good  profit.  He 
therefore  decides  to  sell  the  outstanding  accounts  or  bor- 
row money  on  them.  Feeling,  however,  that  it  would  be 
disastrous  to  permit  the  purchaser  to  collect  the  accounts, 
thus  making  his  customers  aware  of  the  fact  that  he 
had  sold  them,  he  sometimes  resorts  to  the  expedient  of 
selling  the  accounts,  or  borrowing  money  on  them,  with 
the  understanding  that  he  will  be  permitted  to  collect 
them  and  account  to  the  purchaser  for  the  proceeds; 
and  there  are  concerns  whose  regular  business  is  to 
purchase  accounts  receivable,  or  lend  money  on  them, 
subject  to  that  condition.  The  purchaser  runs  a  three- 
fold risk,  namely,  that  invalid  or  fictitious  accounts  will 
be  assigned,  that  the  assigned  accounts  will  not  be  collect- 
ed, and  that,  if  collected,  the  proceeds  will  not  be  turned 
over  to  him.  And,  as  a  rule,  prospective  purchasers  de- 
mand security  against  loss  in  these  particulars,  and 
surety  companies  are  often  asked  to  give  that  security. 

It  is  apparent  however  that  it  is  not  within  the  scope 
of  a  properly  conducted  surety  business  to  guarantee 
that  the  money  due  on  the  accounts  will  be  collected ;  for 
that  would  be  credit  insurance  of  the  worst  character. 
Nor  would  it  be  proper  to  guarantee  that  no  invalid 


BOND  ON   ASSIGNMENT  OF  ACCOUNTS  RECEIVABLE.   223 

accounts  would  be  assigned,  for  that  would  guarantee 
the  validity  of  contracts  about  which  the  surety  would 
have  no  information.  But  under  certain  conditions,  a 
bond  may  be  written  guaranteeing  that  no  wholly  ficti- 
vus  accounts  will  be  intentionally  sold  and  assigned,  and 
that  the  assignor  will  not  misappropriate  any  money  that 
may  be  actually  collected.  Those  are,  in  the  main,  guar- 
antees of  honesty;  and  such  guarantees  are  within  the 
scope  of  the  surety  busMess,  although  it  would  seem 
to  be  better  to  limit  the  guarantee  to  misappropriations 
of  money  actually  collected.  In  any  event,  the  risk,  as 
we  shall  see,  is  extra-hazardous,  and  is  to  be  assumed 
only  in  cases  of  carefully  selected  concerns  and  where 
the  risk  can  be  surrounded  with  the  proper  safeguards. 
One  company,  which  formerly  made  a  specialty  of  this 
business,  has  entirely  abandoned  it  as  unprofitable,  but 
it  is  believed  that  by  carefully  selecting  the  risks,  sound- 
ing them  with  the  most  approved  safeguard,  and  charg- 
ing a  rate  of  2%  or  more,  the  business  would  be  profit- 
able. 

Sec.  142.— Opportunity.  It  is  usually  one  of  the 
conditions  of  the  contract  of  assignment  that  the  assignee 
shall  not  make  it  known  to  the  debtors  that  the  accounts 
have  been  assigned,  and  therefore,  it  is  not  possible  for 
the  assignee  to  verify  the  outstanding  assigned  accounts 
by  sending  statements  or  bills  to  the  debtors.  But,  if  no 
verification  is  to  be  made,  it  will  not  be  difficult  for  the 
assignor  to  assign  fictitious  accounts  and  to  omit  to  pay 
over  money  collected  and  account  for  his  failure  to  do 
so  by  saying  the  money  has  not  been  collected.  There 
are  few,  if  any,  cases  where  a  surety  company  would  be 


224   BOND  ON  ASSIGNMENT  OF  ACCOUNTS  RECEIVABLE. 

justified  in  taking  a  fidelity  risk  where  the  opportunities 
were  so  absolutely  unlimited  and  where  no  satisfactory 
audit  or  check  could  be  made.1  In  order  to  make  these 
bonds,  as  a  class,  worthy  of  consideration,  it  has  been 
found  necessary  that  some  arrangement  be  made  by 
which  the  assignee  can  make  a  satisfactory  audit  of  the 
outstanding  accounts.  The  method  followed  by  an  audit 
company,  when  making  an  audit  of  a  bank,  suggests  a 
method  applicable  to  this  case.  The  audit  company 
sends  to  each  depositor  a  notice  of  the  amount  to  his 
credit  as  shown  by  the  books  of  the  bank  and  asks  if  that 
amount  is  correct.  So  it  would  seem  to  be  feasible,  in 
most  cases,  to  have  an  audit  company  or  a  professional 
auditor,  for  a  nominal  fee,  periodically,  say  once  in  three 
months,  to  send  statements  or  bills  to  the  debtors  of  all 
outstanding  assigned  accounts.  The  replies  to  such 
statements  would  probably  show  what  accounts,  if  any, 
were  fictitious  and  what,  if  any,  had  been  paid.  The 
sending  of  such  statements  would  ordinarily  not  excite 
any  suspicion;  and  it  is  suggested  that  a  condition  to 
that  effect  be  put  in  all  bonds  of  this  class.  Other 
methods  just  as  good  or  better  may  perhaps  be  suggested, 
but  the  point  is  that  unless  a  way  be  provided  by  which 
the  genuineness  of  the  assigned  accounts,  and  the  alleged 
non-payment  of  accounts  that  are  due,  can  be  verified, 
the  business  is  ordinarily  not  desirable. 

The  opportunity  may,  in  a  measure,  be  limited  by 
arranging  to  have  an  employee  of  the  assignor,  such, 
as  the  cashier  or  bookkeeper,  who  has  no  financial  in- 


iSee  Section  12. 


BOND  ON  ASSIGNMENT  OF  ACCOUNTS  RECEIVABLE.   225 

terest  in  the  business,  designated  as  agent  of  the  assignor, 
to  make  the  assignments  and  collect  the  accounts ;  and  by 
having  him  alone  made  the  principal  in  the  bond.  In 
cases  where  the  assignor  is  a  firm  or  corporation,  it  is 
specially  important  that  this  be  done,  because  (1)  a 
surety  company  cannot  afford,  in  one  bond  and  for  one 
premium,  to  take  a  fidelity  risk  on  more  than  one  per- 
son; and  (2)  any  conversion  would  likely  be  made  to 
the  use  of  the  firm  or  corporation;  and  it  is  doubtful 
if  that  would  constitute  a  punishable  offense  by  any 
individual.2  And  even  where  the  assignor  is  an  indi- 
vidual, it  would  be  safer  to  make  an  employee  the  prin- 
cipal. The  employee  will  not  be  subject  to  the  same 
temptation  as  the  employer,  although  he  will  be  more 
or  less  under  the  employer 's  influence ;  and  f urthermore, 
the  necessity  for  his  signature  will  require  collusion 
between  at  least  two  persons  to  commit  a  breach  of 
the  bond.  When  such  an  arrangement  is  made,  the  in- 
demnity of  the  real  parties  in  interest, — the  members 
of  the  firm  or  the  officers  of  the  corporation3 — ought  to 
be  required. 

Sec.  143. — Temptation.  If  these  bonds  are  issued 
only  on  behalf  of  those  who  can,  after  paying  interest 
and  expenses,  use  the  money  profitably  to  increase  their 
business,  the  temptation  will  not  be  extraordinary.  But 
it  is  especially  necessary  to  avoid  the  man  who  has  a 
large  volume  of  accounts  payable,  who  is  being  pressed 
by  his  creditors,  and  who  is  trying  to  borrow  in  order 
to  avoid  bankruptcy;  for  in  that  event  the  temptation 


2See  Section  16. 
sSee  Section  199. 


226   BOND  ON  ASSIGNMENT  OF  ACCOUNTS  RECEIVABLE. 

may  be  very  great.  In  the  ordinary  fidelity  bond,  we 
deal  with  a  man  who  is  making  his  living  from  his 
salary,  where  his  earnings  are  deemed  sufficient  for  his 
needs  and  where  there  is  theoretically  no  extraordinary 
temptation  to  convert  the  employer's  money.  If  we 
bond  a  man  who  is  in  financial  straits,  we  shall  be  deal- 
ing with  a  merchant,  who  has  no  credit  at  the  banks, 
and  who,  in  order  to  meet  his  bills,  is  compelled  to  sell 
his  accounts  receivable  at  a  liberal  discount  or  borrow 
on  them  at  a  high  rate  of  interest.  And  the  discount 
or  the  interest,  being,  in  many  cases,  sufficient  to  con- 
sume a  large  portion  or  all  of  the  net  profit  on  the  goods 
sold,  it  will  be  only  a  matter  of  time  when  the  advances 
he  can  get  on  his  accounts  will  not  be  sufficient  to  meet 
his  bills,  and  he  will  be  compelled  to  sell  fictitious  ac- 
counts, or  use  some  of  the  money  he  has  collected  on  ac- 
counts which  he  has  assigned,  or  be  forced  into  bank- 
ruptcy. It  is  hard  for  a  man  to  reliquish  a  business, 
which  may  be  his  only  means  of  livelihood  and  which 
perhaps  he  has  built  up  after  years  of  effort;  and  the 
temptation  to  use  the  assignee's  money  in  anticipation 
of  better  things,  is  hard  to  resist,  especially  if  there  is  a 
chance  that  its  use  can  be  concealed  for  a  reasonable 
length  of  time.  The  applicant's  books  should  therefore 
be  examined  for  the  purpose  of  determining  whether  or 
not  his  bills  and  accounts  payable  are  unusually  large 
and  whether  or  not  any  of  them  are  overdue.  If  there 
is  any  evidence  that  he  is  being  pressed  by  his  cred- 
itors or  that  he  is  getting  the  money  to  meet  his  bills 
and  not  to  increase  his  business,  the  bond  should  be 
declined. 


BOND  ON   ASSIGNMENT  OF  ACCOUNTS  RECEIVABLE.    227 

Another  subtle  temptation  may  creep  into  a  case 
•of  this  kind  as  a  result  of  the  payment  of  the  accounts, 
by  the  respective  debtors,  before  they  are  due.  If  an 
account  should  be  paid  to  the  assignor  before  it  is  due, 
he  will  most  likely  consider  that  he  is  entitled  to  use  the 
money  until  the  maturity  of  the  account,  and  will  there- 
fore put  it  into  the  business,  intending,  perhaps,  to  pay 
it  over  to  the  assignee  at  the  proper  time.  When  the 
account  does  mature,  he  may  not  be  able  to  pay  back  the 
money,  and  may  thus  get  behind  and  eventually  be 
forced  into  bankruptcy. 

Sec.  144. — The  personality  of  the  Risk.  In  con- 
sidering the  moral  risk  in  a  particular  case,  it  is  of 
course  necessary  to  investigate,  not  only  the  record  of 
the  applicant  who  is  to  be  the  principal  in  the  bond,  but 
of  all  parties  interested,  that  is,  the  members  of  the  firm 
or  the  officers  of  the  corporation,  as  the  case  may  be ;  for 
they  will  no  doubt  be  the  moving  cause  of  any  breach 
of  the  bond,  notwithstanding  the  act  may  be  done  by 
the  applicant.  And  such  bonds  should  be  issued  only 
for  concerns  whose  reputation  for  honesty  and  integrity 
is  firmly  established;  and  the  record  of  the  principal 
should  be  investigated,  not  only  to  ascertain  his  prob- 
able honesty,  but  also  the  probability  that  he  will  act  in- 
dependently of  the  assignor  in  matters  relating  to  his 
obligations  under  the  bond. 

Sec.  145.— Summary.  Reviewing  the  contents  of 
this  chapter,  we  find: 

(1)  That  the  bond  should  be  limited  to  cover  only 
the  misappropriation  of  money  or  property  actually 
collected  on  the  assigned  accounts;  although  it  may  be 


228   BOND  ON  ASSIGNMENT  OF  ACCOUNTS  RECEIVABLE. 

reasonable,  in  some  cases,  to  guarantee  that  no  wholly 
fictitious  accounts  will  be  knowingly  assigned. 

(2)  That  the  opportunity  and  temptation  are  so 
great  as  to  render  the  risk  extra-hazardous. 

(3)  But  where  the  bond  is  so  restricted  as  to 
permit  a  representative  of  the  assignee,  at  reasonably 
frequent  intervals,  to  verify  the  outstanding  assigned 
accounts;  where  an  employee  of  the  assignor  is  made 
the  agent  of  the  assignee  to  make  the  collections,  and  he 
alone  made  the  principal  in  the  bond;  and  where  the 
applicant  does  not  need  the  money  to  take  care  of  his 
accounts  payable,  but  can  profitably  use  it  to  increase 
his  business,  the  risk  may  be  acceptable,  provided  an 
adequate  premium  be  obtained. 


CHAPTER  IX. 
BONDS  FOR  INSURANCE  COMPANIES. 

Sec.  146. — Scope.  In  a  number  of  tihe  states,  it  is 
necessary  for  certain  classes  of  insurance  companies,  in 
order  to  get  permission  to  transact  their  business  in 
those  states,  to  give  bond  with  surety  for  the  payments 
of  the  losses  under  their  policies.  The  laws  in  the  dif- 
ferent states  relating  to  this  subject  are  not  uniform, 
although  all  of  the  bonds  will  fall  within  one  of  the 
three  following  classes:  (1)  Those  covering  all  policies 
issued  during  a  period  of  one  year, — a  new  bond  being 
required  each  year;  (2)  those  covering  all  losses  that 
accrue  during  the  year, — a  new  bond  being  likewise 
required  each  year;  and  (3)  those  covering  all  policies 
which  may  be  issued  and  all  losses  that  may  accrue, 
without  any  limitation  as  to  time. 

Sec.  147. — Liability — When  it  accrues.  It  is  of 
course  apparent  that  an  insurance  company  can,  if  it 
sees  fit,  dispute  any  claim  that  may  be  presented,  with- 
out regard  to  its  merits,  and  force  the  claimant  to  sue 
and  get  judgment;  and,  the  surety  cannot  be  required 
to  pay  a  claim  that  is  disputed  by  the  principal.  And, 
inasmuch  as  an  insurance  company  must  pay  the  judg- 
ments against  it  or  go  into  the  hands  of  a  receiver,  it  is 
clear  that  the  surety  cannot  be  required  to  pay  any- 
thing, so  long  as  the  principal  is  solvent.  The  in- 
solvency of  the  principal  is  therefore  a  condition  pre- 
cedent to  any  liability  under  the  bond. 


230  BONDS  FOR  INSURANCE  COMPANIES. 

Sec.  148.— Liability— Extent  of,   in  General.     In 

event  an  insurance  company  does  become  insolvent,  the 
liability  of  the  surety,  under  any  of  the  three  forms  of 
bonds,  would  be  two-fold.  In  the  first  place,  the  surety 
would  have  to  take  care  of  all  losses,  within  the  scope 
of  the  bond,  that  had  not  been  adjusted  and  settled  at 
the  time  of  the  appointment  of  the  receiver.  In  the  sec- 
ond place,  the  surety  would  have  to  take  care  of  all 
future  losses  on  policies  then  in  force  and  covered  by  its 
bond ;  but  this  liability  could  be  practically  satisfied  by 
reinsuring  the  risks  with  some  other  responsible  com- 
pany. The  measure  of  liability  for  the  outstanding  in- 
surance is  therefore  the  cost  of  reinsuring  it.  The  cost 
of  reinsurance  will  depend  somewhat  upon  the  kind  of 
insurance.  In  order  to  reinsure  a  life  policy  (where 
the  loss  is  bound  to  occur,  and  the  premium  is  paid  to 
take  care  of  the  loss),  it  would  be  necessary  to  pay  the 
reinsuring  company  an  amount  equal  to  the  total  of  all 
the  premiums  that  have  been  paid,  plus  interest  at  the 
rate  usually  earned  by  insurance  companies.  In  the 
case  of  a  fire  or  other  similar  policy  (where  the  pre- 
mium is  paid  for  taking  the  risk  of  a  contingency  which 
may  or  may  not  occur)  reinsurance  could  ordinarily  be 
effected  by  paying  the  unearned  portion  of  the  pre- 
mium; that  is,  the  premium,  for  such  part  of  the  time 
covered  by  the  policy  as  had  not  expired. 

It  is  however  not  to  be  assumed  that  the  amount 
necessary  to  take  care  of  the  pending  claims  and  to  re- 
insure the  outstanding  policies,  will  be  a  total  loss  to  the 
surety.  Insurance  companies  are  required  by  law  to 
carry  a  reserve  for  both  of  these  purposes;  and  this 


BONDS  FOR  INSURANCE  COMPANIES.  231 

reserve,  together  with  the  capital  of  the  company,  ought 
to  take  care  of  this  liability.  Although  some  insurance 
companies  are  lax  in  the  matter  of  putting  up  reserves, 
it  is  fair  to  assume,  in  the  absence  of  evidence  of  a  con- 
trary tendency  on  the  part  of  the  management,  that 
the  vigilance  of  the  insurance  commissioners  in  the  sev- 
eral states  will  cause  the  companies  to  maintain  ap- 
proximately the  reserves  required  by  law.  If  a  com- 
pany does  maintain  its  reserves,  they,  together  with 
the  capital  of  the  company,  would  ordinarily  be  suffi- 
cient to  take  care  of  its  liabilities;  and  the  principal 
danger  of  loss  to  the  surety  would  be  the  failure  of  the 
company  as  a  result  of  some  great  catastrophe,  such  as 
a  great  conflagration,  plague  or  epidemic,  involving  ex- 
traordinary losses. 

If  such  a  catastrophe  should  occur  outside  of  the 
state  in  which  the  bond  was  filed,  the  principal  loss,  if 
any,  under  the  bond  would  be  the  amount  necessary  to 
complete  the  reinsurance  of  the  policies  then  in  force  in 
the  state.  If  on  the  other  hand,  the  catastrophe,  should 
occur  in  the  particular  state,  there  would  no  doubt  be  a 
large  number  of  losses  to  be  adjusted,  in  addition  to  the 
reinsuring  of  the  outstanding  policies;  and  the  full 
penalty  of  the  bond  would  probably  be  consumed. 

In  the  last  analysis  therefore,  the  contingency  to 
be  especially  guarded  against,  is  the  issuance  of  a  bond 
for  a  company  that  is  not  particularly  strong  and  whose 
business  in  the  particular  state  is  so  large  that  an  un- 
usual disaster  in  that  state  would  probably  bankrupt 
the  company.  In  the  case  of  life  companies,  the  danger 
is  probably  negligible,  as  the  possibility  of  a  serious 
epidemic  in  any  of  the  states  in  question  is  very  remote, 


232  BONDS  FOR  INSURANCE  COMPANIES. 

but  it  is  well  to  avoid  fire  companies  which  have  a  large 
volume  of  business  concentrated  in  a  single  city  in  the 
state,  and  liability  companies  which  have  in  the  state 
large  concentrated  risks  so  that  one  or  two  accidents 
might  bring  disaster.  This  phase  of  the  matter  must  of 
course  be  considered  in  connection  with  the  strength  of 
the  company,  its  total  business  and  the  form  of  bond  re- 
quired.1 

Sec.  149.— Liability— As  Affected  by  the  Time  Cov- 
ered by  the  Bond.  Other  things  being  equal,  the  de- 
sirability of  any  particular  risk  will  depend  upon  the 
strength  of  the  principal.  But,  inasmuch  as  the  finan- 
cial condition  of  an  insurance  company  at  any  particu- 
lar time  is  not  necessarily  a  true  index  of  what  it  will 
be  in  the  years  to  come,  it  is  apparent  that  a  bond  which 
will  carry  liability  far  into  the  future  is  not  ordinarily 
a  desirable  risk,  no  matter  what  may  be  the  present 
condition  of  the  principal. 

A  bond  which  covers  all  losses  that  accrue  in  the 
future,  without  any  limitation  as  to  time,  guarantees 
the  solvency  of  the  principal  for  all  time,  and  is  there- 
fore necessarily  an  undesirable  risk  for  a  surety.  Be- 
ing an  obligation  in  favor  of  the  people  of  the  state,  and 
no  method  of  release  being  provided  by  law,  the  surety 
would  have  to  continue  on  the  bond,  even  though  dis- 
aster might  be  imminent.  Such  an  indefinite  guarantee 
with  no  provision  for  release,  is  not  a  legitimate  surety 
risk  and  should  be  put  on  the  prohibited  list. 

A  bond  which  guarantees  the  payment  of  all  losses 
on  policies  issued  during  the  period  of  one  year  may 


iSee  next  Section. 


BONDS  FOR  INSURANCE  COMPANIES.  233 

likewise  carry  the  liability  far  into  the  future.  In  life 
insurance,  it  often  happens  that  liability  on  a  policy 
does  not  accrue  for  fifty  years  or  more  after  its  issu- 
ance ;  and  a  surety  company  cannot  afford  to  guarantee 
the  solvency  of  an  insurance  company  at  the  end  of  fifty 
years,  or  twenty-five  years,  or  even  ten  years.  Such 
risks  ought  likewise  to  go  on  the  prohibited  list.  In  the 
case  of  fire  or  casualty  insurance  companies,  the  poli- 
cies are  most  often  written  to  cover  a  period  of  only  one 
year,  although  in  some  cases  they  do  cover  three  or  five 
years.  While  it  is  necessary  to  be  cautious  in.  guaran- 
teeing the  solvency  of  a  company  for  as  much  as  five 
years,  yet  the  proposition  is  not  necessarily  impossible, 
and  the  bond  may  perhaps  be  executed  for  a  few  of  the 
high-grade  companies. 

Where  the  bond  guarantees  the  payment  of  all 
losses  that  accrue  during  the  period  of  a  year,  liability 
ordinarily  terminates  at  the  end  of  that  time;  and  the 
matter  of  guaranteeing  the  solvency  of  a  corporation 
for  as  much  as  a  year  is  of  course  not  an  extraordinary 
surety  proposition.  But  under  the  statutes  of  some 
states,  the  liability  on  one  annual  bond  does  not  termi- 
nate until  another  is  filed ;  so  that  if  a  company  should 
become  insolvent  during  the  year,  or  fail,  at  the  end  of 
the  year,  to  give  a  new  bond,  the  surety  would  have  to 
stand  all  future  losses,  or  reinsure  all  outstanding  poll- 
ing policies.  Hence  the  importance,  even  with  this  form 
of  bond,  of  avoiding  a  company  whose  premium  income 
in  the  state  is  particularly  large  or  out  of  proportion  to 
its  total  business  and  its  financial  strength. 


234  BONDS  FOR  INSURANCE  COMPANIES. 

Sec.  150. — Summary.     The  main  features  of  this 
chapter  are: 

(1)  That  the  insolvency  of  the  principal  is  a  condi- 
tion precedent  to  any  liability. 

(2)  That  the  maximum  liability  is  the  amount  nec- 
essary to  take  care  of  the  pending  claims,  and  to  rein- 
sure the  outstanding  policies ;  and  that,  except  in  cases  of 
extraordinary  catastrophes,  the  assets  of  the  company 
are  likely  to  be  sufficient  for  those  purposes. 

(3)  That  the  real  hazard  is  in  proportion  to  the 
probability  that  a  catastrophe  in  that  state  would  affect 
the  solvency  of  the  company,  and,  in  event  of  insolvency, 
the  amount  of  probable  loss  is  in  proportion  to  the  pre- 
mium income  in  the  state. 

(4)  That  only  those  bonds,  which  guarantee  the 
payment  of  losses  that  accrue  during  the  year  covered 
by  the  bond,  are  ordinarily  acceptable ;  although  it  may 
be  reasonable,  for  selected  companies  other  than  life, 
to  execute  a  bond  covering  all  policies  issued  during  the 
year  covered  by  the  bond. 


CHAPTER  X. 
Miscellaneous  Credit  Guarantees. 

Sec.  151. — In  General.  We  have  already  consid- 
ered certain  credit  guarantees,  which  may  be  required  in 
connection  with  litigation,  and  have  discussed  the  under- 
writing of  bonds  of  that  character.  Those  are,  how- 
ever, not  the  only  credit  guarantees  which  surety  com- 
panies may  be  asked  to  issue.  Application  is  often 
made  for  bonds  which,  though  not  needed  in  connec- 
tion with  litigation,  directly  guarantee  the  payment  of 
money ;  as  for  example,  where  it  is  desired  to  guarantee 
that  one  of  two  joint  makers  of  a  promissory  note  will 
pay  it  and  thereby  exonerate  the  other.  In  most  cases, 
however,  the  guarantee  is  not  absolute  but  depends 
upon  a  contingency  which  may  or  may  not  happen. 

Credit  guarantees  are  often  presented  in  the  guise 
of  contracts  or  mere  honesty  risks,  so  that  it  is  often 
necessary  to  look  carefully  for  the  danger  signal  of 
credit  guarantee.  Any  proposition  that  is  not  clearly 
within  the  scope  of  one  of  the  foregoing  recognized 
classes  of  bonds  should  be  carefully  examined  to  see 
whether  or  not  the  bond  will  directly  or  indirectly  guar- 
antee that  the  principal  will  pay  a  sum  of  money,  either 
absolutely  or  upon  a  contingency.  If  so,  the  bond  should 
be  rated  as  a  credit  guarantee. 

In  underwriting  bonds  of  this  kind,  the  same  gen- 
eral principles  will  apply  as  in  the  case  of  judicial 
credit  guarantees,  and  reference  is  made  to  the  appro- 


236  MISCELLANEOUS   CREDIT   GUARANTEES. 

priate  sections.1    For  convenience,  these  principles  may 
be  summarized  as  follows : 

1.  A  surety  company  cannot  afford,  for  the  small 
premium  received,  to  gamble  on  the  chance  that  the  con- 
tingency upon  which  the  liability  depends  will  not  hap- 
pen.   There  is  a  reasonable  chance  that  it  will  happen, 
or  the  bond  would  not  be  required,  and  the  underwriter 
must  assume  it  will  happen. 

2.  Collateral  security  in  the  shape  of  cash  or  its 
equivalent  in  marketable  securities  to  an  amount  equal 
to  the  greatest  possible  liability  (generally  the  amount 
of  the  bond)  should  be  required. 

3.  Collateral  should  not  be  waived  unless  the  ap- 
plicant is  a  partnership  or  corporation,  which  does  not 
depend  for  its  success  upon  any  one  man  and  which 
has  a  well  established  non-speculative  business  of  at 
least  ten  years'  standing;  unless  the  concern  is  rated  by 
the  mercantile  agencies  at  fifteen  times  the  amount  of 
the  bond  with  the  highest  grade  of  credit  and  the  finan- 
cial statement  is  verified  to  a  reasonable  extent,  and  un- 
less the  applicant  bears  a  first-class  reputation  in  every 
respect. 

4.  Collateral    should    never    be    waived    on    the 
strength  of  outside  personal  indemnity,  no  matter  how 
strong  the  indemnitors  may  be.    Experience  shows  that 
even  if  they  are  solvent  when  liability  accrues,  they  are 
likely  to  be  slow  in  meeting  the  obligation,  so  that  the 
surety  company  will  be  required  to  put  up  the  money 
and  await  the  pleasure  of  the  indemnitors  in  making 
reimbursement,  or  perhaps  will  have  to  sue  the  indem- 


iSee  Section  76. 


MISCELLANEOUS   CREDIT   GUARANTEES.  237 

nitors.  That  subjects  the  surety  to  many  chances  of 
loss,  and  in  any  event,  makes  the  busines  unprofitable. 

5.  The  more  distant  the  maturity  of  the  obliga- 
tion, the  greater  the  chance  that  the  financial  condition 
of  the  principal  will  change,  and  therefore  the  greater 
the  chance  of  loss  if  the  bond  should  be  written  without 
collateral. 

In  the  succeeding  paragraphs,  some  of  the  more 
important  miscellaneous  credit  guarantees  will  be  con- 
sidered, and  they  will  show  the  application  of  the  fore- 
going rules  or  principles. 

Sec.  152.— Bond  to  Discharge  a  Mechanic's  Lien. 
We  have  seen  that  in  many  states  a  man  who  has  done 
work  or  furnished  material  for  a  building  may,  by 
filing  a  statement  of  his  claim  on  the  office  of  a  clerk 
of  court,  or  other  public  office,  obtain  a  lien  on  the 
building  and  the  land  upon  which  it  stands,  for  the 
amount  due1  The  law  generally  provides  that  such  a 
lien  may  be  discharged,  and  the  property  freed  there- 
from, by  the  giving  of  a  bond  conditioned  in  effect  to 
pay  the  claim  if  it  be  found  to  constitute  a  valid  lien. 
Liens  of  this  kind  are  most  often  filed  for  labor  and 
materials  furnished  to  a  contractor;  and  when  so  filed, 
the  owner,  as  he  has  a  right  to  do,  generally  declines  to 
make  further  payments  until  his  property  is  freed  from 
the  lien.  Contractors,  desiring  that  the  regular  pay- 
ments under  the  contract  shall  continue,  are  the  most 
frequent  applicants  for  bonds  of  this  kind. 

Such  a  bond  is  of  course  a  credit  guarantee  in  that 


iSee  Section  115. 


238  MISCELLANEOUS   CREDIT   GUARANTEES. 

it  guarantees  the  payment  of  money;  and,  while  the 
guarantee  does  not  become  operative  unless  the  claim 
is  held  to  be  a  valid  lien,  yet  a  surety  underwriter  must 
assume  the  claim  is  valid.  The  liability  can  safely  be 
estimated  at  nothing  less  than  the  full  amount  of  the 
claim,  with  interest  and  such  costs,  counsel  fees  and 
expenses  as  will  probably  be  necessary  to  establish  the 
claim  as  a  lien;  and  as  an  underwriting  proposition,  it 
it  is  a  rule  of  almost  universal  application  that  collateral 
security  to  that  amount  should  be  required.1  These 
propositions  are  essentially  bad  because : 

1.  While  a  contractor  may  have  a  good  record  and 
may  be  in  good  standing,  the  very  fact  that  he  has  per- 
mitted a  lien  to  be  filed  against  him  is  evidence  that  he 
is  in  financial  difficulties  or  that  he  is  over-trading.     The 
filing  of  the  lien  should  operate  as  a  warning  to  the 
surety  company  to  "tighten  up"  on  the  issuance  of  con- 
tract bonds  rather  than  as  a  license  to  issue  hazardous 
credit  guarantees  without  collateral. 

2.  The  business  of  a  contractor  is  essentially  specu- 
lative, so  that  contractors  are  not  of  the  class  for  whom 
credit  guarantees  can  safely  be  executed  without  col- 
lateral. 

In  practice,  however,  strong  arguments  for  the  is- 
suance of  these  bonds  without  collateral  are  often 
brought  to  bear  upon  an  underwriter,  as  for  example : 

1.  The  applicant,  a  contractor,  may  be  a  regular 
client  of  the  company  and  in  the  habit  of  getting  what 
he  wants  in  the  way  of  contract  bonds,  and  may  expect 


iSee  Section  151. 


MISCELLANEOUS   CREDIT   GUARANTEES.  239 

the  company  to  issue  this  bond  without  collateral,  so 
that  to  require  collateral  may  mean  the  loss  of  all  the 
contractor's  business. 

2.  It  may  be  contended  (though  it  is  very  seldom 
true)   that  the  contractor  in  fact  has  ample  funds  to 
meet  all  just  and  proper  claims  against  him,  but  that 
he  genuinely  and  in  good  faith  disputes  the  claim  in 
question  and  is  unable  to  settle  it  on  a  fair  basis. 

3.  The  company  may  be  surety  on  the  particular 
contract  bond,  and  as  such  may  be  liable  for  all  valid 
liens;  and  it  may  be  that  the  claim  in  question,  for  the 
most  part,  is  undoubtedly  a  valid  lien,  so  that  the  issu- 
ance  of   the   bond   to   discharge   the   lien  would   not 
materially  increase  the  liability. 

4.  Though  the  surety  company  may  not  be  liable 
for  liens,  yet  it  may  appear  that  unless  the  contractor's 
regular  payments  are  made,  he  will  be  unable  to  com- 
plete the  contract,  so  that  unless  the  bond  is  issued,  the 
contractor  will  default  and  throw  a  loss  on  the  surety. 

These  arguments  will  be  taken  up  in  order,  the  first 
two  being  considered  together.  It  is  of  course  manifest 
that  it  is  not  wise,  by  needlessly  requiring  collateral,  to 
drive  away  a  perfectly  good  client;  and  it  may  perhaps 
be  said  that  where  the  applicant,  a  contractor,  though 
he  has  ample  funds  to  meet  all  just  and  valid  claims, 
genuinely  and  in  good  faith  disputes  the  claim  in  ques- 
tion, and  is  unable  to  settle  it  on  a  fair  basis ;  where  the 
applicant  is  worth,  in  net  availagbe  assets,  fifteen  times 
the  amount  of  the  bond,  has  not  an  excessive  amount  of 
work  on  hand,  and  is  a  regular  and  very  satisfactory 


240  MISCELLANEOUS   CREDIT    GUARANTEES. 

client  of  the  particular  company,  that  company  being  on 
the  contract  bond  in  question,  then  it  may  be  the 
part  of  wisdom  to  issue  the  bond  without  collateral  if 
it  is  necessary  to  do  so  in  order  to  retain  the  business 
of  the  applicant.  However,  if  it  is  a  fact  that  the  ap- 
plicant has  ample  funds,  then  he  should  be  willing  to 
put  up  as  collateral  the  amount  admitted  to  be  due  and 
owing.  To  make  that  requirement  is  a  test  of  the  ap- 
plicant's sincerity  and  good  faith  and  it  is  advised  in 
all  cases. 

Where  the  third  argument  appears  it  may  be  as- 
sumed that  the  applicant  is  in  financial  difficulties ;  and 
the  case  would  not  be  one  that  should  even  be  con- 
sidered as  an  underwriting  proposition.  The  case  then 
becomes  one  for  the  legal  and  claim  departments  of  the 
company,  and  it  is  their  prerogative,  and  not  that  of  the 
underwriters,  to  say  whether  or  not  it  is  advisable  thus 
to  enable  the  contractor  to  get  money  which,  in  event 
of  his  default,  would  be  in  the  hands  of  the  owner  for 
the  benefit  of  the  surety. 

Likewise,  the  fourth  argument  would  not  be  made 
unless  the  contractor  is  in  financial  straits  and  it  should 
never  induce  an  underwriter  to  issue  the  bond.  It  would 
be  little  less  than  foolhardy  to  issue  the  bond  in  that 
case;  but,  in  any  event,  it  is  a  matter  for  the  legal  and 
claim  departments  and  not  the  underwriters. 

Sec.  153. — Bonds  for  the  Payment  of  Rent.  Bonds 
which  guarantee  the  payment  of  rent  are  very  hazardous 
because : 

1.  They  are  clearly  credit  guarantees,  absolutely 
guaranteeing  the  payment  of  money. 


MISCELLANEOUS   CREDIT   GUARANTEES.  241 

2.  They  usually  cover  the  rent  for  a  term  of  years ; 
and  before  the  expiration  of  the  lease,  a  very  strong 
principal    may    become    insolvent,    may    die,    or    may 
"jump"  his  lease  and  dispose  of  his  property. 

3.  The  fact  that  a  bond  is  required  is  generally 
evidence  that  the  lessee  is  weak  financially  and  cannot 
be  depended  upon  to  pay  the  rent;  although  in  some 
cases,  the  bond  is  required  by  law,  or  in  pursuance  of  a 
uniform   rule  of  the  lessor  to  require  a  bond  in  all 
cases  regardless  of  the  strength  of  the  lessee. 

As  a  rule  therefore,  collateral  security  to  the  full 
amount  of  the  rent  should  be  required;  and  it  may  be 
released  in  instalments  as  the  rent  is  paid.  Collateral 
may,  with  reasonable  safety,  be  waived  where  the  ap- 
plicant meets  the  requirements  heretofore  laid  down  with 
reference  to  credit  guarantees  in  general;1  where  the 
bond  is  required  by  law  or  in  pursuance  of  a  uniform 
rule  of  the  lessor;  and  where  the  bond  does  not  guar- 
antee the  payment  of  rent  for  a  longer  period  than  the 
year  then  next  ensuing.  And  in  some  cases,  where  the 
applicant  is  exceptionally  strong  and  where  the  bond 
is  required  by  law,  it  may  be  reasonably  safe  to  guar- 
antee the  rent  for  as  much  as  two  years.  But  in  no 
event  should  the  payment  of  rent  under  a  lease  for  more 
than  two  years  be  guaranteed  without  full  collateral. 

gee.  154.— Bond  to  Produce  Bill  of  Lading  and  Pay 
Freight  Charges.  In  ordinary  course  of  business,  it 
often  happens  that  bills  of  lading  do  not  reach  the  con- 
signee promptly;  and  it  being  a  rule  of  the  railroads 
that  freight  will  be  delivered  only  upon  the  presenta- 


iSee  Section   151. 


242  MISCELLANEOUS   CREDIT    GUARANTEES. 

tion  of  the  bill  of  lading,  it  is  manifest  that  unless  some 
satisfactory  provision  is  made,  merchants  will  often  be 
delayed  in  receiving  freight  that  has  actually  arrived  at 
the  depot.  It  is  also  very  inconvenient  for  large  mer- 
chants to  be  required  to  pay  every  individual  freight 
bill  before  their  drivers  will  be  permitted  to  remove  the 
freight.  In  order  that  their  patrons  may  be  accommo- 
dated, the  railroads  generally  permit  merchants  of  good 
standing  to  remove  freight  consigned  to  them  promptly 
upon  its  arrival;  the  merchants  paying  the  freight 
bills  weekly  or  oftener  and  producing  the  bills  of  lading 
as  soon  as  they  arrive  or  when  the  freight  is  paid.  But 
it  is  the  general  practice  of  the  railroads  to  require  the 
merchants  to  whom  they  grant  this  privilege  to  give  bond 
conditioned  for  the  prompt  delivery  of  all  bills  of  lading 
and  for  the  prompt  payment  of  all  freight  charges. 

Such  bonds  are  of  course  credit  guarantees,  and 
collateral  would  ordinarily  be,  the  rule.1  But  applicants 
for  these  bonds  are  usually  concerns  of  good  credit  stand-  s 
ing  who  can  get  credit  of  this  kind  without  giving  col- 
lateral; accordingly  these  bonds  are  generally  exe- 
cuted by  the  companies,  without  collateral,  in  all  cases 
where  the  applicant  has  a  satisfactory  credit  rating- 
say  $20,000  or  better,  first  grade,  but  only  when  adequate 
provision  is  made  for  the  protection  of  the  surety. 

There  are  two  important  provisions  that  should  be 
in  every  such  bond.  The  first  is  a  provision  for  can- 
cellation upon  notice  to  the  railroad.  In  discontinuing 
to  grant  this  accommodation,  the  railroad  is  not  sub- 
jected to  any  hardship,  so  it  will  generally  consent  to  a 


iSee  Section  151. 


MISCELLANEOUS   CREDIT   GUARANTEES.  243 

clause  authorizing  the  surety  to  cancel  upon  reasonable 
notice,  say  two  or  three  days ;  it  being  understood  that 
the  surety  shall  remain  liable  for  the  charges  on  all 
freight  delivered  prior  to  the  expiration  of  that  time. 
And  secondly  there  ought  to  be  a  provision  that  in  case 
of  the  non-payment  of  the  freight  charges  within  twenty, 
or  at  most  thirty,  days  after  delivery  of  the  freight,  the 
railroad  will  notify  the  surety.  Bearing  in  mind  that 
these  bonds  are  not  intended  for  the  purpose  of  per- 
mitting an  extension  of  credit  to  the  principal,  but  only 
for  his  convenience  in  enabling  him  to  remove  freight 
promptly  upon  its  arrival  at  the  depot,  with  the  under- 
standing that  he  will  promptly  pay  the  charges,  it  is 
evident  that  if  the  principal  does  not  pay  promptly, 
the  surety  ought  to  be  notified  so  that  it  may  take  such 
steps  as  it  may  deem  necessary  for  its  protection,  includ- 
ing especially  the  exercising  of  its  right  to  terminate 
the  liability. 

Generally  each  railroad  has  its  own  printed  form  of 
bond,  and  it  is  not  often  possible  to  get  them  to  make 
any  special  exception.  But  the  point  for  the  under- 
writer to  bear  in  mind  is  that  in  cases  where  the  bond 
does  not  contain  these  two  provisions,  great  care  should 
be  exercised  and  they  should  be  executed  only  for  very 
strong  concerns,  rated  at  say  fifty  thousand  dollars,  or 
where  collateral  security  is  obtained.  As  we  have  seen, 
credit  guarantees  which  will  continue  in  force  for  a 
long  time  are  particularly  hazardous,  and  as  a  rule  can 
safely  be  executed  only  with  collateral.1 

Sec.  155.— Patent  Infringement  Bonds.    Our  pat- 


iSee  Section  151. 


244  MISCELLANEOUS   CREDIT   GUARANTEES. 

ent  laws  are  such  that  a  man  may  obtain  letters  patent 
on  almost  any  device,  unless  substantially  an  exact  dupli- 
cate has  already  been  filed  in  the  patent  office;  but  he 
can  seldom  be  sure  the  device  is  not  in  fact  an  infringe- 
ment of  some  previous  patent,  until  it  has  been  so  de- 
termined by  the  Supreme  Court  of  the  United  States. 
And  it  is  the  law  that  a  purchaser  of  an  article  which 
is  an  infringement  of  a  patent  may  be  compelled  to 
pay  to  the  rightful  patentee  a  proper  royalty,  which 
would  be  approximately  the  difference  between  the  cost 
of  making  the  article  and  the  price  at  which  it  was 
sold. 

It  often  happens  that  there  are  different  concerns 
manufacturing  similar  articles,  each  manufacturer  claim- 
ing to  have  a  patent.  Where  such  an  article  is  sold, 
the  purchaser  generally  requires  the  seller  to  give  him 
a  bond  with  surety  to  indemnify  him  against  loss  on 
account  of  suits  that  may  be  brought  against  him  on  the 
ground  that  the  article  in  question  is  an  infringement 
of  a  patent. 

Such  bonds  are  considered  hazardous,  as  they  may 
involve  the  surety  in  litigation  extending  over  a  period 
of  three  or  four  years,  at  the  end  of  which  time  the 
principal  may  be  dead  or  insolvent,  and  the  surety  may 
be  called  upon  for  damages  equal  to  the  penalty  of  the 
bond.  If  it  should  be  decided  that  the  principal  is  not 
in  fact  the  patentee  of  the  article,  it  is  likely  to  result 
in  his  bankruptcy,  particularly  if  the  manufacture  of 
this  article  constitutes  a  substantial  part  of  his  busi- 
ness. It  will  be  seen  therefore  that,  as  in  all  cases  of 


MISCELLANEOUS   CREDIT   GUARANTEES.  245 

long-term  credit  guarantees,  collateral  security  to  the 
full  amount  of  the  bond  should  be  required.1 

In  some  cases,  it  is  possible  to  limit  the  liability 
under  the  bond  to  any  loss  sustained  during  a  period  of, 
say,  one  year  from  the  date  of  the  bond,  so  that  if  the 
litigation  should  not  terminate  within  that  time,  there 
would  be  no  liability  except  for  costs  and  expenses  in- 
curred during  the  year.  In  that  event,  the  financial 
condition  of  the  applicant  is  not  so  likely  to  change 
before  the  termination  of  the  bond;  and  where  the  ap- 
plicant is  a  well  established  concern,  worth  exclusive  of 
the  patent  rigJits,  ten  times  the  amount  of  the  bond, 
collateral  may  perhaps  be  waived.  Where,  however, 
there  is  no  limitation  as  to  time,  the  concern  must  indeed 
be  a  very  strong  one  to  justify  the  execution  of  the  bond 
without  collateral,  as  surety  companies  are  seldom  justi- 
fied, without  collateral,  in  writing  credit  guarantees 
where  the  liability  may  not  accrue  for  four  or  five  years. 
A  mercantile  credit  rating,  or  net  worth,  of  fifteen 
times  the  amount  of  the  bond  is  requisite. 

Sec.  156.— Bond  to  Guarantee  Payment  for  Mer- 
chandise to  be  Delivered  in  the  Future.  Reference  has 
been  made  to  the  case  where  a  bond  is  required  to  guar- 
antee the  future  delivery  of  merchandise.2  There  are 
also  cases  where  a  bond  is  required  to  guarantee  that 
a  contract  for  the  sale  and  delivery  of  merchandise 
will  be  carried  out,  not  by  the  party  who  has  agreed  to 
deliver  the  goods,  but  by  the  party  who  has  agreed  to 
accept  them  and  pay  the  price.  Such  contracts  gener- 


iSee  Section  151. 
2See  Section  118. 


246  MISCELLANEOUS   CREDIT   GUARANTEES. 

ally  cover  a  continuing  supply  of  a  certain  article,  as 
for  example,  the  output  of  a  mill  or  factory.     If  the 
principal  should  fail  to  take  the  goods  and  pay  the 
price,  the  surety  would  be  required  to  do  so.     The  bond 
is  therefore  in  a  sense,  a  credit  guarantee;  but  inas- 
much as  goods  are  to  be  received  for  the  money  that  is 
to  be  paid,  it  is  clear  that,  so  long  as  the  goods  are 
worth  the  price,  there  will  be  no  loss  under  the  bond. 
The  measure  of  the  surety's  liability  is  therefore  the 
possible   difference  between   the   market  value   of   the 
goods  at  the  time  they  are  to  be  delivered,  and  the 
price  provided  by  the  contract.    In  view  of  the  possi- 
bility that  the  market  value  of  the  goods  may  decline, 
it  is  clear  that  the  transaction  is  a  speculative  one  and 
that  the  bond  should  not  be  executed  unless  the  princi- 
pal is  sufficiently .  strong  financially  to  justify  a  reason- 
able expectation  that  he   could  and  would  stand  the 
probable  loss.     If  he  is  not,  collateral  security  for  the 
amount  of  the  probable  loss  should  be  secured. 

If  however,  the  goods  are  to  be  delivered  and  the 
price  paid  afterward,  so  that  the  surety  might  be  called 
on  to  pay  the  money  without  getting  the  goods,  then 
the  bond  is  a  credit  guarantee,  and  the  surety  should  be 
secured  against  loss  in  the  same  way  and  to  the  same 
extent  that  a  bank,  which  was  loaning  that  amount  of 
money  for  the  term  of  the  bond,  would  expect  to  be 
secured.2 

Sec.  157. — Bond  of  Mortgagor  to  make  Improve- 
ments on  Mortgaged  Premises  or  to  Satisfy  Liens.    It 


2gee  Section  151. 


MISCELLANEOUS   CREDIT   GUARANTEES.  247 

often  happens  that  a  man  who  owns  a  piece  of  land 
attempts  to  borrow  the  money  necessary  to  build  a 
house  or  make  other  improvements.  If  the  land  is  of 
sufficient  value,  as  compared  with  the  value  of  the  pro- 
posed improvements,  the  money  to  make  the  improve- 
ments can  sometimes  be  borrowed  on  mortgage,  pro- 
vided the  borrower  will  give  a  bond  guaranteeing  that 
he  will  make  the  proposed  improvements  within  a  speci- 
fied time,  to  the  end  that  the  security  for  the  loan  may 
be  adequate.  Applications  for  such  bonds  are  often 
made  to  surety  companies,  and,  by  executing  them,  the 
companies  have  sustained  some  severe  losses,  so  they  are 
not  looked  upon  with  favor  under  any  conditions.  How- 
ever, there  is  nothing  necessarily  vicious  about  these 
propositions  if  the  proper  tests  are  applied  so  as  to 
weed  out  the  undesirable  risks. 

In  practice,  it  is  found  that  the  land  is  rarely  of 
sufficient  value  to  justify  a  loan  of  the  full  amount 
necessary  to  erect  the  proposed  improvements,  and 
furthermore,  the  borrower  is  generally  required  to  pay 
a  considerable  portion  of  the  loan  as  a  bonus  to  the 
lender  or  to  the  broker  who  negotiated  the  loan.  The 
result  is  that  the  net  amount  of  the  loan  is  insufficient 
to  make  the  improvements;  and  trouble  has  come  to 
surety  companies  in  cases  where  the  borrower  did  not 
have  enough  money  of  his  own  to  makft  up  the  defici- 
ency, so  that  the  surety  company  was  required,  at  its 
own  expense,  to  complete  the  building.  In  underwrit- 
ing these  bonds,  it  is  absolutely  necessary  to  be  satisfied 
that  the  applicant  has  sufficient  money  to  make  the 
improvement,  and  that  the  money  will  be  available  for 


248  MISCELLANEOUS   CREDIT    GUARANTEES. 

the  purpose.     The  safest  way  to  reach  that  conclusion 
is  to  make  the  following  requirements: 

1.  That  the  applicant  let  a  contract  for  the  improve- 
ment to  a  responsible  contractor  who  will  enter  into 
the  usual '  written  contract  with  the  applicant  and  his 
surety. 

2.  That  the  contractor  give  bond  with  an  acceptable 
corporate   surety,    payable   to   the    applicant   and   his 
surety,  as  their  interests  may  appear,  and  conditioned 
for  the  completion  of  the  contract  on  or  before  the 
specified  time,  subject  to  the  proper  penalties  for  delay, 
and  subject  to  the  same  conditions  (and  no  others)  as 
those  to  which  the  applicant  and  his  surety  are  subject. 

3.  That  the  applicant  place  with  the  surety  company 
an  amount  equal  to  the  contract  price  and  authorize 
the  surety  company  to  pay  the  money  to  the  contractor 
in  accordance  with  the  terms  of  the  contract. 

4.  That  the  contract  contain  a  stipulation  that  the 
plans  and  specifications  may  not  be  changed  without 
the  consent  of  the  surety  company,  to  the  end  that  a 
more  expensive  building  may  not  be  substituted. 

These  requirements,  if  strictly  followed,  would  seem 
to  make  the  bond  in  favor  of  the  mortgagee  perfectly 
safe;  and  they  may  be  considered  as  the  standard  con- 
ditions upon  which  these  bonds  may  be  written. 

It  often  happens,  however,  that  the  applicant  is  him- 
self a  builder,  and  wishes  to  construct  the  building, 
believing  he  can  do  it  for  less  than  a  contractor 
would  charge.  Bearing  in  mind  that  the  troublesome 
cases  have  been  those  in  which  the  borrower  himself 
has  attempted  to  do  the  work,  and  where  the  available 


MISCELLANEOUS   CREDIT   GUARANTEES.  249 

money  was  insufficient,  it  is  clear  that,  in  such  cases, 
great  diligence  and  care  must  be  exercised  to  ascertain 
that  the  money  is  sufficient.  The  following  require- 
ments will  generally  make  such  a  proposition  as  good 
as  the  ordinary  contract  bond: 

1.  That  in  honesty,  ability,  experience  and  equip- 
ment for  the  particular  work,  the  applicant  measure 
up  to  the  highest  standard  of  efficiency. 

2.  That  the  plans  and  specifications  be  submitted 
to  a  thoroughly  competent  and  practical  contractor  and 
builder,  who  has  the  interest  of  the  surety  company  at 
heart,  and  that  he  make  an  estimate  of  the  cost  of  the 
building. 

3.  That  the  usual  sub-contracts  be  let  and  that  con- 
tracts be  made  for  the  material  for  the  building,  so 
that  in  reality  the  only  thing  to  be  estimated  will  be 
the  labor,  supervision  and  incidentals. 

4.  That  all  sub-contractors  and  material  men,  who 
have   not   satisfactory   credit   rating,    give  bond   with 
corporate  surety. 

5.  That  the  applicant  place  with  the  surety  company 
not  only  an  amount  equal  to  the  estimated  cost  of  the 
building,  but  also  a  margin  of  at  least  ten  per  cent, 
to  cover  contingencies. 

6.  That  the  usual  precautions  as  to  fire  and  liability 
insurance  be  taken. 

Under  these  conditions,  the  risk  is  about  the  same 
as  on  an  ordinary  contract  bond — the  chance  of  loss 
being  in  proportion  to  the  probability  that  the  cost 
of  the  building  will  exceed  the  estimated  cost  plus  ten 


250  MISCELLANEOUS   CREDIT    GUARANTEES. 

per  cent.  And  it  is  to  be  borne  in  mind  that  if  the  ten 
per  cent,  margin  is  not  put  up,  the  risk  is  just  that  much 
greater  than  it  would  be  on  a  contract  bond  for  the 
same  work,  as  a  contract  price  always  equals  the  esti- 
mated cost  plus  about  ten  per  cent,  for  profit. 

In  some  cases,  it  happens  that  the  applicant,  in  order 
to  make  up  a  deficiency  of  cash,  will  arrange  with 
some  of  the  sub-contractors  and  material  men  to  take 
his  note  and  wait  for  their  money  until  the  completion 
of  the  building,  subordinating  their  claims  to  that  of 
the  mortgagee.  In  that  event,  the  following  require- 
ments, in  addition  to  those  outlined  above,  should  be 
made : 

1.  That  the  sub-contractors  and  material  men  sign 
written  contracts  with  both  the  applicant  and  the  sure- 
ty company,  so  that  if  the  applicant  should  default, 
the  contract  would  be  binding  in  favor  of  the  surety 
company. 

2.  In    case    the    principal    should    default    and    a 
sub-contractor  should  fail  to  comply  with  his  contract, 
the  surety  would  have  to  pay  some  one  else  to  do  the 
work,  so  that  the  surety's  damage  would  be  the  total 
amount  of  the  sub-contract,  or  the  value  of  the  uncom- 
pleted portion  of  it.     It  is  therefore  necessary,  in  each 
sub-contract,  to  recite  the  facts  and  to  make  provision 
that  in  event  of  default,  the  full  amount  of  the  con- 
tract, or  the  value  of  the  uncompleted  portion  of  it, 
will  be  the  damage  that  will  be  sustained  by  the  surety, 
and  to  insert  a  stipulation  for  the  payment  of  that 
damage. 


MISCELLANEOUS   CREDIT   GUARANTEES.  251 

3.  That  the  sub-contractors  and  material  men  give 
satisfactory  bond  for  the  performance  of  the  contract 
and  for  the  payment  of  the  stipulated  damage  in  case 
of  default. 

It  is  believed  that  the  losses  on  bonds  of  this  kind 
have  been  sustained,  not  because  the  bonds,  as  a  class, 
are  necessarily  bad,  but  because  the  proper  tests  to 
weed  out  the  unfit  were  not  applied.  It  is  necessary 
not  only  to  avoid  speculative  builders  but  also  the  man 
who  is  attempting/ in  good  faith  perhaps,  to  do  too 
much  with  a  given  amount  of  money.  These  proposi- 
tions require  the  careful  attention  of  an  experienced 
man,  not  only  in  investigating  the  risk  and  making 
proper  arrangements  for  the  protection  of  the  surety, 
but  also  in)  handling  the  details  after  the  bond  is  exe- 
cuted. This  means  a  considerable  expense  which  should 
of  course  be  borne  by  the  applicant. 

The  same  observations  would  apply  to  a  lessee,  who 
undertook  as  one  of  the  conditions  of  the  lease,  to  erect 
a  building  on  the  leased  premises. 

In  some  cases  the  money  is  not  borrowed  until  after 
the  completion  of  the  building,  though  before  the  ex- 
piration of  the  time  within  which  liens  may  be  filed, 
so  that  a  bond  to  pay  such  lien  as  may  be  filed  is  all 
that  is  required.  In  that  event,  the  surety  company 
will  have  to  concern  itself  only  with  the  question  of 
outstanding  bills  for  labor  and  material.  Investigation 
ought  to  be  made  to  determine  the  amount  of  the  out- 
standing bills,  a  statement  being  obtained  from  each  sub- 
contractor and  furnisher  of  material  as  to  the  amount 
due  and  a  release  being  obtained  from  those  who  are 


252  MISCELLANEOUS   CREDIT   GUARANTEES. 

supposed  to  have  been  paid.  Then  the  applicant  should 
be  required  to  place  subject  to  the  joint  control  of  the 
surety  enough  money  to  take  care  of  the  outstanding 
bills,  with  a  margin  of  at  least  ten  per  cent,  for  contin- 
gencies. The  surety  may  permit  this  money  to  be  used 
in  payment  of  such  bills  as  could  be  converted  into  valid 
liens;  and  the  balance  should  be  held  until  the  expira- 
tion of  the  time  for  filing  liens.  If  no  liens  have  then 
been  filed,  the  case  may  be  closed  and  the  balance  of  the 
money  returned  to  the  principal. 

Sec.  158. — Franchise  Bonds.  In  earlier  times,  it 
was  quite  a  practice  for  influential  citizens  to  obtain 
from  a  city,  or  other  body  politic,  a  franchise  giving  the 
right,  or  perhaps  the  exclusive  right,  to  erect  a  lighting 
plant,  a  street  railway  or  other  public  utility,  and  then 
hold  the  franchise  for  sale  to  the  highest  bidder.  The 
result  was  that  the  erection  of  the  needed  public  utility 
was  often  delayed.  In  consequence,  it  is  now  generally 
the  practice  to  require  of  the  grantee  of  such  a  fran- 
chise a  bond  conditioned  that  he  will  erect  the  utility, 
or  cause  it  to  be  erected,  and  have  it  in  operation  within 
a  specified  time ;  and  in  view  of  the  impossibility  of  as- 
certaining the  damages  which  the  public  sustains  by  a 
breach  of  the  bond,  it  has  been  uniformly  held  that  the 
entire  penalty  of  the  bond  is  to  be  forfeited,  as  liqui- 
dated damages,  in  case  of  a  breach.  Such  risks  are 
necessarily  hazardous  because  (1)  the  grantee  of  the 
franchise  may  not  intend  to  erect  the  utility  himself, 
but  may  contemplate  a  sale  of  the  franchise  to  a  third 
party ;  and  such  sale  may  not  be  effected,  or  if  it  is,  the 
purchaser  may  not  be  able  to  erect  the  utility  within  the 


MISCELLANEOUS   CREDIT   GUARANTEES.  253 

specified  time;  (2)  even  if  the  grantee  makes  a  bona  fide 
effort  to  erect  the  utility,  he  may  fail  to  complete  it 
within  the  specified  time,  either  from  lack  of  funds 
or  from  causes  beyond  his  control;  and  (3)  if  the  utility 
is  not  completed  within  the  specified  time,  the  whole 
penalty  of  the  bond  will  be  forfeited  as  liquidated  dam- 
ages. 

It  would  seem  therefore  to  be  necessary  to  require 
collateral  security  to  the  full  amount  of  the  bond.1 
However  a  fairly  good  substitute  for  collateral  may  be 
had  in  some  cases  by  requiring  the  grantee  of  the  fran- 
chise to  let  a  contract  for  the  erection  of  the  utility  to 
a  responsible  contractor;  by  requiring  the  contractor  to 
give  bond  with  corporate  surety  for  the  faithful  per- 
formance of  the  contract,  such  bond  to  be  made  payable 
to  the  joint  order  of  the  grantee  of  the  franchise  and  his 
surety;  and  by  requiring  the  grantee  to  place  with  the 
surety  an  amount  of  money  equal  to  the  contract  price, 
and  to  authorize  the  surety  to  pay  it  out  in  accordance 
with  the  terms  of  the  contract.2  In  order  to  make  such 
a  proposition  safe,  it  would  be  necessary  to  obligate- the 
contractor  to  complete  at  or  before  the  time  specified 
in  the  franchise,  and  subject  him  and  his  surety  to  the 
same  penalty  for  failure  to  complete  in  time  as  that  to- 
which  the  grantee  of  the  franchise  is  subject.  It  is 
suggested  that  this  method  be  followed  wherever  it  is 
not  practicable  to  get  good  collateral  security. 

A  franchise  for  a  public  utility  usually  contains 
also  a  provision  requiring  the  giving  of  a  bond  to  in- 


iSee  Section  151. 
2gee  Section  157. 


254  MISCELLANEOUS   CREDIT   GUARANTEES. 

demnify  the  grantor  (city  or  county  as  the  case  may  be) 
against  any  damages  that  may  be  caused  in  the  prosecu- 
tion of  the  work,  reference  being  made  principally  to 
the  damages  that  may  be  incurred  as  a  result  of  the 
tearing  up  of  the  streets,  roads,  etc.  This  is  a  credit 
guarantee,  and  should  be  treated  accordingly,  although 
it  may  be  possible  for  the  principal  to  get  liability  in- 
surance of  such  a  character  as  to  afford  ample  protection 
to  him  and  his  surety. 

Sec.  159.— License  or  Permit  Bonds.  There  are 
laws  in  the  different  states  requiring  many  of  those  who 
receive  licenses  or  permits  from  the  state  or  a  county  or 
city  to  give  bond  either  to  indemnify  the  state,  county 
or  city,  as  the  case  may  be,  against  loss  as  a  result  of 
the  performance  of  the  acts  for  which  the  license  was 
granted,  or  to  protect  the  public  against  loss.  There 
are  literally  thousands  of  different  license  bonds  pro- 
vided for  by  law,  including  bonds  of  saloonkeepers,  pri- 
vate bankers,  plumbers,  users  of  dynamite,  real  estate 
brokers  and  many  others.  The  liability  and  risk  of  the 
surety  are  different  in  the  different  states,  depending 
upon  the  terms  of  the  statute,  and  the  strictness  with 
which  it  is  enforced.  It  is  manifestly  impossible  here  to 
go  into  the  details  of  the  law  in  each  of  the  states  and 
attempt  to  indicate  the  risk  of  the  surety.  The  most 
that  can  b0  done  is  to  make  a  few  general  suggestions, 
which  may  perhaps  be  applied  with  more  or  less  accu- 
racy in  each  case. 

1.  As  a  rule  these  bonds  are  credit  guarantees, 
in  that  they  guarantee  the  payment  of  the  damage  that 


MISCELLANEOUS   CREDIT   GUARANTEES.  255 

may  be  sustained  by  the  state,  county  or  city  or  by  the 
public. 

2.  They  are  none  the  less  credit  guarantees  because 
they  merely  guarantee  that  the  principal  will  pay  over 
money  received.     There  is  no  supervision  by  the  state, 
and  the  chance  of  loss  depends  upon  the  business  suc- 
cess of  the  principal,  as  well  as  upon  his  honesty.    The 
bonds  of  private  bankers,  which  are  perhaps  the  most 
hazardous  of  all  license  bonds,  are  typical  examples. 

3.  While  it  is  not  safe  as  a  rule  for  a  surety  com- 
pany to  weigh  the  possibility  that  the  contingency  upon 
which  liability  depends  will  happen,  yet  the  law  does 
require  bonds  in  some  cases  where  it  has  been  found 
that  the  probability  that  loss  will  be  sustained  by  the 
state,  county  or  city  or  the  public  is  so  remote  as  to  be 
negligible. 

4.  There  are  only  a  few  cases  where  collateral 
security  is  necessary — private  bankers,  for  example — 
but  in  most  cases  the  applicant  should  have  financial 
strength  in  proportion  to  the  nature  of  the  business  in 
which  he  is  engaged,  the  penalty  of  the  bond,  and  the 
chance  that  damage  will  be  sustained. 

5.  Where  the  particular  law,  or  one  substantially 
like  it,  has  been  in  force  for  a  considerable  time — say 
five  years — and  no  losses  have  been  sustained,  it  may 
be  well  enough  to  ignore  the  matter  of  financial  respon- 
sibility.    However,  such  cases  are  rare,  for  bonds  are 
not  required  by  law  unless  damage  is  reasonably  pos- 
sible. 

In  each  case  the  law  relating  to  the  duties  and 
liabilities  of  the  licensee  must  be  examined,  and  should 


256  MISCELLANEOUS   CREDIT   GUARANTEES. 

be  considered  in  the  light  of  the  terms  of  the  bond  and 
the  experience  in  the  particular  state.1 

Sec.  160. — Refunding  Bonds.  A  refunding  bond, 
as  its  name  indicates,  is  a  bond  which  guarantees  that 
the  principal  "will,  upon  the  happening  of  a  named  con- 
tingency, pay  back  a  sum  of  money  he  has  received.  It 
is  possible  to  conceive  of  any  number  of  circumstances 
under  which  such  bonds  may  be  required.  There  may 
be,  for  example,  two  claimants  to  a  fund  in  the  hands  of 
o  third  person,  and  such  third  person  may  be  willing  to 
deliver  it  to  one  of  them,  provided  that  one  will  give 
a  bond  to  return  the  money  in  case  it  be  subse- 
quently shown  that  the  fund  belonged,  in  fact,  to  the 
ether.  Or  a  fiduciary,  feeling  that  there  is  some  doubt 
about  the  right  of  a  certain  person  to  receive  a  distribu- 
tive share  of  the  estate,  may  nevertheless  be  willing  ta 
make  the  distribution  to  him,  provided  he  will  give  a 
bond  to  return  the  property  in  case  it  be  found  that  he 
was  not  entitled  to  it.  Such  bonds  are  nearly  always 
required  by  the  administrator  of  the  estate  of  a  man 
who  is  not  known  to  be  dead,  but  whose  death  has  been 
presumed  from  long  absence. 

In  practically  all  of  such  cases,  the  bond  is  a  credit 
guarantee,  in  that  it  guarantees  the  payment  of  money 
in  case  the  contingency  mentioned  in  the  bond  should 
happen.  The  risk  is  of  course  in  proportion  to  the  prob- 
ability that  the  contingency  will  happen;  but,  as  we 
have  seen,  it  is  not  the  province  of  a  bonding  company 
to  weigh  this  probability  for  it  must  be  remembered 
that  in  these,  as  in  all  other  cases  of  suretyship,  the  pre- 


iSee  Section  151 


MISCELLANEOUS   CREDIT    GUARANTEES.  257 

mium  is  paid  merely  for  the  use  of  the  surety's  name 
and  credit,  and  not  for  taking  the  risk  that  the  con- 
tingency will  happen.  On  bonds  of  this  kind,  collateral 
should  be  the  rule.1 

Sec.  161. — Bond  for  Deportation  of  Immigrants. 
Congress  has  provided  that  any  alien  who  shall  enter 
the  United  States  in  violation  of  law  and  such  as  shall 
likely  become  a  public  charge  from  causes  existing  prior 
to  landing,  shall  be  taken  into  custody  and  deported  to 
the  country  whence  he  came  at  any  time  within  three 
years  from  the  date  of  entry;  provided  that  pending 
the  final  disposal  of  the  case  of  an  alien  so  taken  into 
custody,  he  may  be  released  under  a  bond  in  the  penalty 
of  not  less  that  five  hundred  dollars  conditioned  that 
such  alien  shall  be  produced  when  required  for  a  hear- 
ing in  regard  to  the  charge  upon  which  he  has  been 
taken  into  custody,  and  for  deportation  if  he  shall  be 
found  to  be  unlawfully  within  the  United  States.  (Act 
Feb.  20,  1907,  ch.  1134,  Sec.  20.). 

Such  a  bond  is  in  effect  a  bail  bond,1  in  that  it 
guarantees  that  the  principal  will  appear  to  answer 
what  is  in  effect  a  criminal  charge,  and  one  for  which 
he  may  be  deported ;  and  in  that,  the  whole  penalty  of 
the  bond  will  be  forfeited  in  case  of  his  failure  to 
appear.  A  surety  company  cannot  of  course  take  the 
risk  that  an  immigrant,  when  once  admitted  to  this 
country,  will  voluntarily  put  himself  in  a  position  to  be 
deported;  and  it  follows  that  collateral  security  to  the 
full  amount  of  the  bond  should  always  be  required. 


iSee  Section  151. 
iSee  Section  95. 


258  MISCELLANEOUS   CREDIT   GUARANTEES. 

Sec.  162. — Bond  of  Indemnity  Against  Immigrant 
Becoming  a  Public  Charge.  Any  alien  who  is  liable 
to  be  excluded  because  likely  to  become  a  public  charge 
or  because  of  physical  disability  other  than  tuberculosis 
or  a  loathsome  or  dangerous  contagious  disease,  may,  if 
otherwise  admissable,  nevertheless  be  admitted,  in  the 
discretion  of  the  Secretary  of  Commerce  and  Labor, 
upon  the  giving  of  a  bond  conditioned  to  hold  the 
United  States,  or  any  state,  territory,  county,  munici- 
pality or  district  thereof,  harmless  against  such  alien 
becoming  a  public  charge.  (Act  Feb.  20,  1907,  C.  1134, 
Sec.  26.). 

If  any  particular  immigrant  is,  in  the  opinion  of 
the  immigration  officers,  likely  to  become  a  public 
charge,  then  manifestly  a  surety  company  cannot,  with- 
out collateral  security  to  the  full  amount  of  the  bond, 
guarantee  that  he  will  not  become  a  public  charge.  As 
we  have  seen,  it  is  not  the  business  of  a  surety  company 
to  take  risks  of  that  sort ;  the  premium  being  merely  for 
the  use  of  the  surety's  name  and  credit.  And  if  the 
immigrant  should  become  a  public  charge,  the  whole 
penalty  of  the  bond  would  no  doubt  be  exhausted,  so 
that  collateral  security  to  the  full  amount  of  the  bond 
should  always  be  required.  It  would  seem  that  such 
collateral  would  have  to  be  retained  for  quite  a  long 
time, — if  indeed  it  could  ever  be  released ;  for  it  is  prac- 
tically impossible  to  say  with  certainty  when  the  possi- 
bility that  an  immigrant  will  become  a  public  charge 
has  passed. 


CHAPTER  XI. 
INTERNAL  REVENUE  BONDS. 

Sec.  163. — Scope.     In  order  to  insure  the  collection 
of  the  internal  revenue  to  which  the  Federal  Govern- 
ment is  by  law  entitled,  many  of  those  whose  duty  it  is 
to   pay  those  taxes   are  required  to   give  bond,  with 
surety,  conditioned  in  effect  that  they  will  perform  their 
duty  in  this  respect.    Internal  revenue  taxes  are  levied 
mainly  on  liquors  and  tobacco,  so  that  manufacturers 
of,  and  dealers  in,  those  articles  are  the  prinicpal  ones 
who  are  required  to  give  such  bonds.    These  bonds  are 
undoubtedly  credit  guarantees,  in  that  they  guarantee 
the  payment  of  money ;  yet  the  collection  of  the  taxes  is 
surrounded  by  so  many  safeguards,  and  the  penalties 
for  failure  are  so  burdensome  that  a  loss  seldom  occurs. 
In  the  preceding  chapters,  we  have  been  dealing 
with  bonds  where  the  liability  varied  according  to  the 
law  of  the  several  states,  or  according  to  the  different 
forms  of  bonds  of  the  several  companies.  It  has  not  been 
possible,  therefore,  to  point  out  specifically  the  liability 
in  each  case ;  but  it  has  been  necessary,  by  induction,  to 
formulate  general  principles  from  which  it  is  hoped  the 
liability  under  any  particular  bond  may  be  determined. 
The  bonds  which  are  the  subject  of  this  chapter,  being 
required  by  Federal  authority,  are  uniform  throughout 
the  country,  so  it  will  be  possible  to  consider  the  specific 
liability  and  risk  under  each  bond.    While  the  question 
whether  or  not  a  particular  applicant  is  able  and  willing 
to  perform  the  obligation  thus  outlined  will  be  deter- 


260  INTERNAL  REVENUE  BONDS. 

mined,  in  a  measure,  in  accordance  with  the  principles 
heretofore  announced,  yet  some  specific  suggestions  will 
be  made  with  regard  to  the  chance  of  loss  under  each 
bond. 

It  seems  unnecessary,  however,  to  attempt  to  point 
out  the  risk  on  all  the  bonds  that  may  be  required  in 
this  connection,  as  some  of  them  are  used  very  infre- 
quently, and  some  involve  practically  no  chance  of  loss. 
We  shall  deal  therefore  only  with  those  which  are  used 
most  frequently. 

The  bonds  of  the  internal  revenue  officers  are  not 
within  the  scope  of  this  chapter ;  they  are  public  official 
bonds  and  should  be  considered  in  the  light  of  Chapter 
II.  This  chapter  is  limited  to  the  bonds  required  to  be 
given  by  manufacturers  of  and  dealers  in  articles  sub- 
ject to  an  internal  revenue  tax. 

Sec.  164.— Distillers'  Bonds.  An  internal  revenue 
tax  is,  by  law,  imposed  on  all  distilled  spirits;  and,  in- 
asmuch as  it  would  be  compartively  easy  for  a  distiller, 
if  left  free  to  act  upon  his  own  inclination,  to  dispose  of 
the  liquors  distilled  by  him,  without  paying  the  tax, 
Congress  has  made  elaborate  provision  to  insure  the 
payment  of  the  taxes  when  due. 

The  law  provides,  in  the  first  place,  that,  if  any  per- 
son engages  in,  or  carries  on,  the  business  of  a  distiller 
with  intent  to  defraud  the  United  States  of  the  tax  on 
the  spirits  distilled  by  him,  "all  distilled  spirits  or 
wines,  and  all  stills  or  other  apparatus  used  or  intended 
to  be  used  for  the  distillation  or  rectification  of  spirits, 
*  *  *  found  in  the  distillery  *  *  *  and  all  right  title  and 
interest  of  such  person  in  the  lot  or  tract  of  land  on 


INTERNAL  REVENUE  BONDS.  261 

which  such  distillery  is  situated,  and  all  right,  title  and 
interest  therein  of  every  person,  who  knowingly  has 
suffered  or  permitted  the  business  of  a  distiller  to  be 
there  carried  on,  or  has  connived  at  the  same  *  *  *  shall 
be  forfeited  to  the  United  States."  (R.  S.  Sec.  3281.) 
In  order  to  make  sure  that  the  lien,  imposed  by  Sec. 
3281,  will  operate  on  the  land,  and  to  prevent  the  owner 
of  the  land  (if  he  be  not  the  distiller)  from  contending 
that  he  was  ignorant  of  the  purpose  for  which  the 
property  was  to  be  used,  the  law  further  provides  that  a 
person  shall  not  engage  in  the  business  of  a  distiller 
"unless  he  is  the  owner  in  fee,  unencumbered  by  any 
mortgage,  judgment  or  other  lien,  of  the  lot  or  tract  of 
land  on  which  the  distillery  is  situated;  or,  unless  he 
files  with  the  collector  the  written  consent  of  the  owner 
of  the  fee  or  of  any  mortgage  or  judgment  creditor  *  *  * 
that  the  premises  may  be  used  for  the  purpose  of  dis- 
tilling spirits  *  *  *  and  expressly  stipulating  that  the 
lien  of  the  United  States  for  taxes  and  penalties  shall 
have  priority. "  (R.  S.  Sec.  3263.) 

The  law  not  only  imposes  these  heavy  penalties  for 
any  attempt  to  evade  the  internal  revenue  laws,  but  it 
imposes  restrictions,  which  if  carefully  and  properly 
enforced,  will  go  far  toward  preventing  the  distiller 
from  avoiding  the  payment  of  the  tax. 

It  is  provided  that  the  process  of  distillation  is  to 
be  carried  on  through  continuous  closed  vessels  and 
pipes;  that  the  distiller  must  furnish  the  Commissioner 
of  Internal  Revenue  a  plan  of  the  distillery  showing  the 
location  of  the  vessels  and  pipes;  and  that  at  the  end 
of  each  day,  and  before  midnight,  all  spirits  distilled 


262  INTERNAL  REVENUE  BONDS. 

during  the  day  must  be  conveyed  to  receiving  cisterns, 
which  are  in  charge  of  and  under  the  lock  of  an  internal 
revenue  officer  known  as  a  gauger,  and  can  be  opened 
only  in  his  presence.  Afterward  the  spirits  are  to  be 
withdrawn,  under  the  supervision  of  the  gauger,  from 
the  cisterns  into  casks  or  barrels.  Then  the  spirits  are 
to  be  gauged,  proved  and  marked,  and  immediately 
removed  into  the  distillery  warehouse,  which  is  required 
to  be  maintained  by  the  distiller  on  the  distillery 
premises  to  be  used  only  for  the  storage  of  distilled 
spirits  of  his  own  manufacture,  and  which  is  in  charge 
of  an  internal  revenue  officer  known  as  a  storekeeper. 
The  storekeeper  has  joint  custody  with  the  distiller,  and 
the  law  provides  that  the  warehouse  shall  at  no  time  be 
unlocked,  or  opened  or  remain  open  unless  in  the  pres- 
ence of  the  storekeeper. 

In  addition  to  these  precautions,  each  distiller  is 
required  to  give  a  bond  (Government  Form  30)  condi- 
tioned that  he  will  in  all  respects  faithfully  comply 
with  all  the  provisions  of  law  relating  to  the  duties  and 
business  of  distillers  and  pay  all  penalties  incurred  or 
fines  imposed  on  him  for  a  violation  of  any  of  the  said 
provisions,  and  that  he  will  not  suffer  the  tract  of  land 
on  which  the  distillery  stands,  or  any  part  thereof,  or 
any  of  the  distilling  apparatus  to  be  encumbered  by 
mortgage,  judgment  or  other  lien.  (R.  S.  Sec.  3260.) 
A  new  bond  is  required  to  be  executed  on  the  first  day 
cf  May  each  year. 

The  effect  of  this  bond  is  to  guarantee  that  all 
spirits  that  may  be  distilled  will  be  put  in  the  dis- 
tillery warehouse;  and  the  distiller  is  required  to  give 


INTERNAL  REVENUE  BONDS.  263 

another  bond  conditioned  in  effect  that  the  proper  taxes 
will  be  paid  on  all  spirits  deposited  in  the  distillery 
warehouse.  This  bond  is  called  the  distillers'  warehous- 
ing bond;  and  may  be  given  monthly  (Form  80)  condi- 
tioned to  pay  the  tax  on  all  spirits  deposited  during  the 
preceding  month,  or  may  be  given  annually  (Form  359) 
conditioned  to  pay  the  tax  on  all  spirits  deposited  dur- 
ing the  year,  such  payments  to  be  made  within  eight 
years  from  the  date  of  entry  of  such  spirits  for  deposit 
in  the  warehouse.  This  bond  continues  in  force  until  all 
the  spirits  deposited  during  the  month  or  year,  as  the 
case  may  be,  have  been  lawfully  withdrawn  from  the 
warehouse;  and  if  they  are  not  withdrawn  within  eight 
years  they  may  be  sold  for  the  payment  of  the  tax. 

Now  it  will  be  seen  that  if  the  gauger  and  store- 
keeper, both  of  whom  are  required  to  give  bond  for  the 
faithful  performance  of  their  duties,  comply  with  the 
law,  there  is  little  chance  for  the  distiller  to  dispose 
of  his  product  without  paying  the  tax.  Practically  the 
only  chance  is  to  draw  off  some  of  the  spirits  by  "tap- 
ping" the  pipes  or  by  other  similar  means.  But  in 
view  of  the  forfeiture  of  property  heretofore  mentioned, 
and  of  the  further  fact  that  the  law  provides  a  penalty 
of  fine  up  to  $5,000  and  imprisonment  for  not  less  than 
three  months  nor  more  than  three  years  "whenever  any 
person  removes,  or  aids  or  abets  in  the  removal  of  any 
distilled  spirits,  on  which  the  tax  has  not  been  paid,  to  a 
place  other  than  the  distillery  warehouse  provided  by 
law,  or  conceals  or  aids  in  the  concealment  of  any 
spirits  so  removed "  (R.  S.  Sec.  3296),  it  may  be  as- 
sumed that  where  a  distiller  has  an  established  reputa- 


264  INTERNAL  REVENUE  BONDS. 

tion  and  standing,  and  where  the  distillery  is  of  con- 
siderable value,  he  will  not  attempt  to  avoid  the  pay- 
ment of  the  tax.  That  has  been  the  experience  of  the 
companies,  and  where  a  distiller  is  rated  at  ten  to 
twenty  thousand  dollars,  the  bonds  may  be  executed 
without  hesitation.  However  there  are  many  distillers 
who  do  not  come  up  to  these  requirements,  and  they 
present  the  difficult  cases  for  an  underwriter.  In  the 
South,  particularly,  there  are  many  small  distilleries — 
some  of  them  little  better  than  the  famous  illicit  "stills" 
— which  are  of  little  value,  and  the  owners  of  which 
have  little  or  no  other  property.  It  has  been  found  that 
such  distillers  will  try  once  in  a  while  to  defraud  the 
Government,  and  they  often  impose  a  liability  upon 
their  sureties.  If  the  distillery  has  a  capacity  of  thirty 
gallons  of  proof  spirits  or  less  per  day,  the  distiller  may 
be  exempted  from  the  requirement  that  the  process  of 
distillation  shall  be  carried  on  through  continuous  closed 
vessels  or  pipes,  and  is  not  required  to  furnish  a  plan 
of  his  distillery,  so  that  such  a  distiller  may  more  easily 
evade  the  payment  of  the  tax.  It  has  been  found  that 
attempts  to  evade  the  law  are  most  often  made  where 
the  owner  of  the  distillery  owns  or  operates  one  or  more 
saloons.  In  that  event  the  risk  is  extra-hazardous,  for 
he  is  very  apt  to  use  in  the  saloons  some  liquor  on  which 
the  tax  has  not  been  paid.  Distillers  rated  at  less  than 
the  figures  above  mentioned  are  not  particularly  desir- 
able risks,  but  bonds  for  them  can,  with  comparative 
safety,  be  written  where : 

1.  The  people  owning  and  operating  the  distillery 
have  clear  records  and  a  good  standing  in  the  com- 
munity. 


INTERNAL  REVENUE  BONDS.  265 

2.  Where  the  distillery  has  been  established  say 
five  years,  and  is  worth  from  three  to  five  thousand  dol- 
lars. 

3.  Where  the  distillery  is  not  in  a  section  where 
people  are  in  the  habit  of  trying  to  evade  the  revenue 
laws.    This  is  a  very  important  consideration. 

4.  Where  the  distillers  do  not  directly  or  indi- 
rectly own  or  operate  any  saloons.     Careful  investiga- 
tion should  be  made  on  this  point. 

Sec.  165. — Fruit  Distillers'  Bonds.  Liquor  dis- 
tilled from  fruit,  as  well  as  that  distilled  from 
grain,  is  subject  to  an  internal  revenue  tax;  and  a 
distiller  of  fruit  brandy  is  required  to  give  a  bond 
(form  301/2)  conditioned  that  he  will  faithfully  comply 
with  all  the  provisions  of  law  and  regulations  in  relation 
to  the  duties  and  business  of  distillers  of  brandy  from 
apples,  peaches,  grapes,  pears,  pineapples,  oranges,  apri- 
cots, berries,  prunes,  figs  or  cherries  exclusively,  and  will 
pay  all  penalties  incurred  or  fines  imposed  on  him  for  a 
violation  of  any  of  the  said  provisions.  The  effect  of 
this  bond  is  to  guarantee  that  the  internal  revenue  tax 
en  all  brandy  produced  by  the  principal  will  be  paid. 
He  may  pay  the  tax  each  month  as  the  brandy  is  pro- 
duced, or  he  may,  after  it  has  been  properly  gauged, 
marked,  branded  and  stamped,  cause  it  to  be  removed 
to  a  special  bonded  warehouse.  In  that  event  he  need 
not  pay  the  tax  until  the  brandy  is  taken  from  the  ware- 
house; but  in  order  to  acquire  the  right  thus  to  put 
brandy  in  a  special  bonded  warehouse  and  delay  the 
payment  of  the  tax,  he  will  be  required  to  give  another 
bond  (form  235 — transportation  and  warehousing  bond) 


266  INTERNAL  REVENUE  BONDS. 

conditioned  that,  as  to  all  brandy  removed  from  the 
distillery  for  deposit  in  any  special  bonded  warehouse, 
he  will  safely  transport  the  same  to  and  deposit  it  in 
the  special  bonded  warehouse,  within  the  time  and  in  the 
manner  required  by  law  and  regulations;  that  he  will 
likewise,  upon  the  removal  of  said  brandy  from  the 
special  bonded  warehouse  for  deposit  in  another,  safely 
transport  the  same  to  and  deposit  it  in  the  warehouse 
in  which  the  deposit  is  to  be  made;  and  will  well  and 
truly  pay  the  tax  imposed  by  law,  or  cause  the  same  to 
be  paid,  within  eight  years  from  the  date  of  the  original 
gauge  and  before  withdrawal.  This  bond  covers  all 
brandy  removed  during  the  current  fiscal  year  ending 
June  30th,  and  a  new  bond  is  required  each  year.  Each 
bond  continues  in  force  until  all  the  brandy  deposited 
in  the  warehouse  during  the  year  has  been  lawfully 
withdrawn. 

As  in  the  case  of  distillers  of  spirits,  there  is  prac- 
tically no  chance  to  avoid  paying  the  tax  after  the 
brandy  has  once  been  put  in  a  warehouse,  as  the  store- 
keeper will  see  to  it  that  the  brandy  is  not  removed 
until  the  tax  is  paid,  and^  if  the  distiller  does  not  pay 
the  tax  within  eight  years,  the  brandy  may  be  sold  by 
the  collector,  and  it  will  always  bring  enough  to  pay  the 
tax.  Likewise  there  is  little  danger  that,  after  the  dis- 
tiller has  entered  brandy  for  deposit  in  a  bonded  ware- 
house, he  will  attempt  to  dispose  of  it  without  paying 
the  tax,  as  the  attempt  would  almost  immediately  come 
to  the  attention  of  the  internal  revenue  officers,  and  he 
would  have  to  suffer  the  consequences.  The  chance  of 
loss  under  the  warehousing  bond  (Form  235)  is  there- 


INTERNAL  REVENUE  BONDS.  267 

fore  rather  remote.  The  other  (Form  30%)  is  the  haz- 
ardous bond,  in  that  it  covers  the  contingency  that  the 
distiller  may  dispose  of  some  of  the  brandy  without 
paying  the  tax  and  without  entering  it  for  deposit  in 
a  bonded  warehouse ;  and  it  would  be  comparatively  easy 
for  him  to  do  this,  as  there  is  no  internal  revenue  officer 
to  exercise  control  over  the  brandy,  until  it  is  entered 
for  deposit  in  such  a  warehouse.  It  is  true  that  a  pen- 
alty of  fine  up  to  $5,000  and  imprisonment  up  to  three 
years  is  imposed  for  any  act  that  would  be  a  breach 
of  the  bond;  but  no  forfeiture  of  property  is  provided 
for  by  law,  nor  is  the  distiller  required  by  law  to  be  the 
owner  of  the  property  on  which  the  distillery  is  located. 
Although  the  internal  revenue  collector  is  expected  to 
see  that  no  license  is  issued  unless  the  licensee  is  the 
sole  owner  of  the  distillery,  yet  there  are  cases  where 
the  bond  of  some  person,  who  was  in  no  way  interested 
in  the  distillery,  has  been  accepted. 

As  a  class  therefore  these  bonds  are  more  hazardous 
than  those  of  distillers  of  spirits,  for  there  are  many  of 
such  distilleries,  and  most  of  them  are  small  and  in 
remote  sections ;  and  as  we  have  seen,  the  supervision  of 
the  internal  revenue  officer  is  much  less  thorough.  How- 
ever by  applying  the  same  tests  as  to  distillers  of  spirits,1 
the  undesirable  risks  can,  with  fair  accuracy,  be  elimin- 
ated. In  this  connection  it  is  especially  important  to 
note  the  third  requirement.  In  California  where  the 
business  is  conducted  on  a  large  scale,  and  where  the 
payment  of  the  internal  revenue  tax  is  taken  as  a  mat- 


iSee  Section  164. 


268  INTERNAL  REVENUE  BONDS. 

ter  of  course,  there  have  been  very  few,  if  any,  attempts 
to  evade  the  law.  On  the  other  hand,  in  Ohio,  New 
York  and  some  other  places,  where  the  business  is  on 
a  small  scale,  attempts  to  defraud  the  government  are 
more  frequently  made.  A  good  deal  depends  upon  the 
temper  of  the  people  in  the  particular  locality,  and 
careful  investigation  ought  to  be  made  along  that  line. 
If  in  the  particular  section  there  is  any  evidence  of  a 
disposition  to  evade  the  law,  the  bond  ought  to  be  exe- 
cuted only  where  the  applicant  has  unencumbered  real 
estate  worth  the  amount  of  the  bond,  or  where  satisfact- 
ory indemnity  from  the  owners  of  real  estate  is  received. 

Sec.  166. — Transportation  and  Warehousing  Bond. 
"We  have  just  seen  that  where  a  distiller  of  fruit  brandy 
enters  such  brandy  for  deposit  in  a  special  bonded  ware- 
house, he  must  give  a  transportation  and  warehousing 
bond  (Form  235)  conditioned  in  substance  that  he  will 
safely  transport  the  brandy  to,  and  deposit  it  in,  the 
special  bonded  warehouse  and  that  he  will  pay  the  tax 
imposed  by  law  within  eight  years  from  the  date  of  the 
original  gauge  and  before  withdrawal.1  A  distiller  of 
spirits  is  required  to  give  a  similar  bond  (Form  351) 
in  case  he  desires  to  remove  the  spirits  from  his  dis- 
tillery warehouse  to  a  general  bonded  warehouse;  the 
bond  being  conditioned  that  he  will  safely  transport  the 
spirits  to  and  deposit  the  same  in  the  general  bonded 
warehouse,  and  that  he  will  pay  the  tax  imposed  by 
law  or  cause  the  same  to  be  paid  within  eight  years 
from  the  date  of  the  original  entry  for  deposit  in  his 


iSee  Section  165. 


INTERNAL  REVENUE  BONDS.  261) 

distillery  warehouse  and  before  withdrawal.  These 
bonds  cover  all  the  spirits  removed  during  the  current 
fiscal  year  ending  June  30,  and  a  new  bond  must  be 
given  each  year.  These  bonds  have  not  been  found 
hazardous,  for  the  reason  perhaps  that  distillers  are  not 
so  foolish  as  to  atempt  to  divert  the  spirits  from  the 
warehouse  to  which  they  are  to  be  removed  when  it  is 
certain  such  diversion  will  almost  immediately  be  dis- 
covered and  in  all  probability  they  will  be  sent  to  the 
penitentiary.  After  the  spirits  are  put  in  the  ware- 
house, the  payment  of  the  tax  is  not  a  matter  that  need 
give  the  surety  any  concern,  for  if  the  distiller  does  not 
pay  the  tax  within  eight  years,  the  collector  may  sell 
the  spirits,  and  they  will  always  bring  the  amount  of 
the  tax.  These  bonds  may  be  written  for1  any  distiller 
of  good  standing. 

Sec.  167.— Bond  of  Proprietor  of  a  General  or 
Special  Bonded  Warehouse.  We  have  seen  that  a  dis- 
tiller of  spirits  may  remove  his  product  from  his  dis- 
tillery warehouse  to  a  general  bonded  warehouse,  and 
that  a  distiller  of  fruit  brandy  may  deposit  the  brandy 
in  a  special  bonded  warehouse.  The  internal  revenue 
collector  of  each  district  designates  these  warehouses. 
He  may  designate  one  or  more,  but  not  more  than  ten,, 
warehouses  in  his  district  as  general  bonded  warehouses 
for  the  storage  of  distilled  spirits,  and  one  or  more,  but 
not  more  than  ten,  as  special  bonded  warehouses  for  the 
storage  of  fruit  brandy.  The  proprietor  of  each  of  such 
warehouses  is  required  to  give  a  bond  conditioned  in  effect 
that  he  will  not  permit  any  of  the  liquor  lawfully  stored 
therein  to  be  withdrawn  except  upon  the  permit  of  the 


270  INTERNAL  REVENUE  BONDS. 

collector  of  internal  revenue;  and  when  the  permit  is 
issued,  the  tax  will  have  been  paid.  These  bonds, 
though  continuous,  are  not  hazardous,  for  the  reason, 
as  we  have  seen,  that  each  such  warehouse  is  in  joint 
custody  of  the  proprietor  and  a  government  store- 
keeper, that  it  cannot  be  opened  except  in  the  presence 
of  the  storekeeper,  and  that  the  storekeeper  is  required 
to  give  bond  for  the  faithful  performance  of  his  duties.1 
Besides,  these  warehouses  are  usually  quite  valuable; 
and  that  of  course  serves  as  a  protection  to  the  surety. 
These  bonds  may  be  written  in  practically  all  cases  with- 
out outside  indemnity  or  collateral. 

Sec.  168.— Bond  for  Exportation  of  Distilled 
Spirits.  The  internal  revenue  tax  on  distilled  spirits 
is  required  to  be  paid  only  in  the  event  the  liquor  is  to 
be  consumed  in  this  country.  When  therefore  distilled 
spirits  are  to  be  exported,  the  distiller  may  remove  them 
from  the  warehouse  without  paying  the  tax,  but  in  order 
to  get  the  permission  of  the  collector  to  do  so,  he  must, 
among  other  things,  give  a  bond  (Form  548)  conditioned 
that  the  spirits  shall  be  delivered  on  board  ship  (or  cars, 
where  the  transportation  is  to  be  made  by  rail)  on  the 
arrival  of  the  spirits  at  the  port  and  within  sixty  days 
from  the  date  of  the  bond,  and  that  within  fifteen  days 
from  the  date  of  delivery,  he  will  produce  to  the  col- 
lector satisfactory  proof  that  the  spirits  have  been  so 
delivered,  and  duly  inspected,  entered,  bonded  and 
cleared,  and  that  he  will  pay  the  tax  on  the  deficiency, 
if  any. 


iSee  Section  164. 


INTERNAL  REVENUE  BONDS.  271 

These  bonds,  like  the  transportation  bonds,1  have 
not  been  found  hazardous,  and  may  be  written  with  the 
same  freedom.  Liability  terminates  at  the  end  of  75 
days. 

Sec.  169.— Bond  for  the  Withdrawal  of  Alcohol 
Free  of  Tax,  Under  Sec.  3297,  R.  S.  The  law  provides 
that  alcohol  may  be  withdrawn  from  bonded  ware- 
houses, without  the  payment  of  any  tax,  when  it  is  to  be 
used  for  the  sole  purpose  of  preserving  specimens  of 
anatomy,  physiology,  or  natural  history  belonging  to 
certain  classes  of  institutions,  or  for  the  sole  purpose  of 
use  in  the  chemical  laboratory  of  such  institutions.  But 
the  institution  is  required  to  give  bond  conditioned  that 
the  entire  quantity  of  alcohol,  so  withdrawn,  shall  be 
used  by  the  institution,  or  the  proper  officer  thereof, 
for  the  purposes  above  specified,  and  for  no  other  pur- 
pose; and  that  the  principal  will  produce,  within 
twenty-four  months,  to  the  collector  of  internal  revenue 
for  the  proper  district,  proof  satisfactory  to  that  officer, 
and  to  the  Commissioner  of  Internal  Eevenue,  that  the 
alcohol  has  been  so  used.  The  bond  further  provides 
that,  in  case  the  alcohol,  or  any  part  thereof,  shall  be 
used  for  any  purpose  other  than  that  above  specified, 
the  principal  will  pay,  or  cause  to  be  paid,  the  tax  on 
the  whole  quantity  of  alcohol  withdrawn  from  bond, 
together  with  a  like  amount,  in  addition,  as  a  penalty. 

The  danger,  under  this  bond,  is  that  someone  will 
use  the  name  of  an  institution  as  a  cloak  to  evade  the 
payment  of  the  tax  on  alcohol  to  be  used  for  purposes 
not  within  the  scope  and  intent  of  the  law.  It  is  there- 


iSee  Section  160. 


272  INTERNAL  REVENUE  BONDS. 

fore  necessary  to  be  reasonably  certain  that  the  institu- 
tion is  in  good  standing  and  in  need  of  alcohol  for  the 
purposes  specified  in  the  act;  that  the  individuals  who 
desire  to  withdraw  the  alcohol,  in  the  name  of  the  insti- 
tution, are  connected,  in  a  proper  official  capacity,  with 
the  institution;  and  that  they  intend  to  use  the  alcohol 
for  the  purposes  specified  in  the  act.  If  so  the  bond 
may,  with  reasonable  safety,  be  executed;  especially 
since  institutions  of  this  kind  usually  have  consider- 
able property.  The  collector  of  internal  revenue  is 
required  to  make  an  investigation  as  to  the  purpose  for 
which  the  alcohol  is  to  be  used;  and  if  he  is  not  satis- 
fied that  it  will  be  used  for  a  proper  purpose,  he  may 
refuse  to  issue  the  permit.  This  of  course  serves  as  a 
protection  to  the  surety;  and  where  the  bond  is  small, 
an  independent  investigation  by  the  surety  is  hardly 
necessary;  but  where  the  bond  is  large  the  surety 
should,  for  itself,  make  an  investigation  in  the  particu- 
lars above  specified. 

Sec.  170.— Bond  for  Withdrawal  of  Distilled  Spirits 
Free  of  Tax  Under  Section  3464  R.  S.  When  distilled 
spirits  are  sold  to  any  officer  or  department  of  the  Fed- 
eral Government  for  the  use  of  the  Government,  the  in- 
ternal revenue  tax  is  of  course  not  required  to  be  paid. 
But  before  a  distiller  can  withdraw  the  spirits  from 
the  warehouse,  free  of  tax  for  delivery  to  a  Government 
officer,  he  must  among  other  things,  give  bond  (Form 
544)  conditioned  that  he  will  safely  deliver  the  spirits 
or  cause  them  to  be  delivered  to  a  named  officer  at  a 
named  place  and  that  he  will  within  30  days  furnish  to 
the  collector  a  certificate  of  the  named  officer  showing 


INTERNAL  REVENUE  BONDS.  273 

the  due  delivery  of  the  spirits  to  him.  In  event  of  his 
failure  so  to  deliver  the  spirits,  he  and  his  surety  are 
obligated  to  pay  the  tax  on  all  such  spirits  so  withdrawn 
and  not  so  delivered.  The  risk  under  this  bond  is  about 
the  same  as  under  the  bond  referred  to  in  the  preced- 
ing section  and  may  be  written  under  the  same  condi- 
tions. 

Sec.  171. — Denatured  Alcohol  Bonds.  In  general. 
Under  an  Act  of  Congress  of  June  7,  1906,  domestic 
alcohol  may  be  withdrawn  from  bonded  warehouses, 
without  the  payment  of  the  internal  revenue  tax,  for 
use  in  the  arts  and  industries,  and  for  fuel,  light  and 
power,  provided  the  alcohol  shall  have  been  denatured, 
so  as  to  destroy  its  character  as  a  beverage  and  render 
it  unfit  for  liquid  medicinal  purposes.  Under  the  origi- 
nal Act,  the  denaturing  could  be  done  only  upon  ap- 
plication of  a  registered  distillery  in  denaturing  bonded 
warehouses  specially  designated  for  denaturing  pur- 
poses only;  but,  by  an  amendment  of  March  2,  1907, 
the  commissioner  of  internal  revenue  may  authorize  the 
establishment  of  central  denaturing  bonded  warehouses, 
other  than  those  at  distilleries,  to  which  alcohol  may 
be  transferred  from  distilleries  or  distillery  bonded 
warehouses,  without  the  payment  of  the  internal  reve- 
nue tax,  and  in  which  such  alcohol  may  be  stored  and 
denatured. 

In  order  to  prevent  this  law  from  being  used  as  a 
means  of  avoiding  the  payment  of  the  internal  revenue 
tax  on  alcohol,  which  is  not  in  fact  to  be  denatured  for 
the  purpose^  mentioned  in  the  act,  the  several  persons 
who  are  authorized  to  handle  denatured  alcohol  are 


274  INTERNAL  REVENUE  BONDS. 

required  to  give  bond.  These  bonds  will  be  separately 
considered. 

It  is  proper,  however,  at  this  point,  to  call  atten- 
tion to  the  fact  that  Section  2  of  the  Act  provides  in 
substance  that  any  person  who  withdraws  alcohol  free 
of  tax,  under  the  act,  and  removes  or  conceals  the  same 
for  the  purpose  of  preventing  it  from  being  denatured; 
and  any  person  who  uses  alcohol,  withdrawn  from  bond 
under  the  act,  for  manufacturing  any  beverage  or 
liquid  medicinal  preparation,  or  knowingly  violates  any 
of  the  provisions  of  the  act,  shall  on  conviction  be  fined 
not  more  than  $5,000.00  or  be  imprisoned  not  more  than 
five  years  or  both.  In  addition,  any  person  so  con- 
victed must  forfeit  to  the  United  States  all  personal 
property  used  in  connection  with  the  business,  together 
with  the  building  and  lots  of  ground  constituting  the 
premises  on  which  said  unlawful  acts  are  performed  or 
permitted  to  be  performed. 

Any  breach  of  the  condition  of  any  of  the  bonds 
required  in  pursuance  of  this  act  would  no  doubt  come 
within  the  scope  of  the  prohibitions  of  Section  2;  and, 
in  estimating  the  chance  of  loss,  the  probable  punish- 
ment and  forfeiture  are  to  be  taken  into  consideration. 

Sec.  172. — Distiller's  Denaturing  Warehouse  Bond. 
(Form  572.)  Every  distiller,  who  establishes  a  dena- 
turing warehouse  on  his  distillery  premises,  is  required 
to  give  a  bond  conditioned  that  he  will  well  and  faith- 
fully comply  with  all  requirements  of  the  act  afore- 
said, and  regulations  issued  pursuant  to  said  act,  re- 
specting the  withdrawal,  transfer,  and  denaturation  of 
alcohol  or  rum,  and  will  perform  all  other  acts  and  ren- 


INTERNAL  REVENUE  BONDS.  275 

der  such  reports  as  may  be  required  by  said  act  and  reg- 
ulations; will  pay  on  demand  the  tax  of  one  dollar  and 
ten  cents  on  each  and  every  proof  gallon  of  alcohol  or 
rum  withdrawn  for  transfer  to  said  denaturing  ware- 
house as  to  which  all  requirements  of  said  act  or  regu- 
lations are  not  fully  complied  with;  and  will  likewise 
pay  all  penalties  incurred  and  all  fines  imposed  on  him 
for  a  violation  of  any  of  the  provisions  of  said  act. 

The  essence  of  this  obligation  is  that  the  distiller 
will  not,  under  cover  of  the  act,  withdraw  alcohol  from 
his  distillery  warehouse  without  denaturing  it  in  the 
manner  provided  by  law.  Having  in  view  the  usual 
value  of  a  distillery,  the  fine,  imprisonment  and  for- 
feiture provided  for  by  the  act,  and  the  close  supervi- 
sion exercised  by  the  Internal  Revenue  Department,  it 
may  be  said  to  be  highly  improbable  that  there  will 
ever  be  a  substantial  violation  of  one  of  these  bonds; 
and  the  chances  are  that  a  merely  technical  violation, 
with  regard  to  reports  for  example,  would  not  be  en- 
forced against  the  surety. 

Sec.  173.— Bond  for  Central  Denaturing  Bonded 
Warehouse.  (Form  611).  One  who,  under  the  amend- 
atory act  of  March  2,  1907,  establishes  a  central  dena- 
turing warehouse  is  required  to  give  a  bond  similar  to 
that  required  of  a  distiller  who  establishes  a  denaturing 
warehouse  on  his  distillery  premises.  The  liability  and 
the  hazard  are  substantially  the  same  in  both  cases. 

Sec.  174.— Industrial  Distiller's  Bond.  (Form 
614).  Under  the  Act  of  March  2,  1907,  distilleries  for 
the  manufacture  of  alcohol  for  denaturing  only  may  be 
established.  Such  a  distillery  is  classed  by  regulation 


276  INTERNAL  REVENUE  BONDS. 

as  an  industrial  distillery;  and  the  proprietor  is  au- 
thorized to  denature  the  alcohol  himself  or  send  it  to  a 
central  denaturing  warehouse  for  that  purpose.  He  is 
required  to  give  a  bond  conditioned  in  substance  that 
he  will  safely  keep  the  alcohol  so  manufactured  until 
it  is  denatured  or  put  in  transit  to  a  central  denaturing 
bonded  warehouse;  that  he  will  account  for  all  the 
alcohol  manufactured  by  him  in  a  record  provided  for 
that  purpose,  and  that  he  will  denature,  in  accordance 
with  law  and  regulations,  all  the  alcohol  that  he  may 
select  and  set  aside  for  that  purpose.  The  essence  of 
this  obligation  is  that  all  alcohol  manufactured  by  him, 
must  be  denatured  either  by  himself  or  by  a  central 
denaturing  bonded  warehouse. 

The  hazard  under  this  bond  would  seem  to  be  no 
greater  than  under  a  distiller's  denaturing  warehouse 
bond.1 

Sec.  175.— Transportation  and  Storeroom  Bond. 
(Form  653).  In  order  that  consumers  of  denatured 
alcohol  may  conveniently  get  it  in  quantities  suitable  to 
their  needs,  it  has  been  provided  by  regulation  that 
such  alcohol  may  be  removed,  by  dealers,  from  denatur- 
ing warehouses  and  placed  in  storerooms  specially  set 
apart  for  that  purpose  and  held  for  sale  to  manufac- 
turers authorized  to  procure  and  use  such  alcohol  for 
manufacturing  purposes.  In  order  for  a  dealer  to  get 
permission  thus  to  remove  denatured  alcohol  to  his 
storeroom,  he  must  give  a  bond  conditioned,  in  sub- 
stance, that,  as  to  all  such  alcohol  so  removed,  he  will 


iSee  Section  172. 


INTERNAL  REVENUE  BONDS.  277 

cause  the  same  to  be  safely  transported  to  his  store- 
room, and  that  he  will  safely  store  the  same  therein 
until  lawfully  disposed  of.  In  event  of  his  failure  so 
to  do,  the  bond  provides  that  he  shall  pay  one  dollar 
and  ten  cents  on  each  proof  gallon,  together  with  a  like 
amount,  in  addition,  as  a  penalty.  He  would  of  course 
likewise  be  subject  to  the  penalties  and  forfeiture  pro- 
vided in  Section  2. 

The  risk  under  this  bond  is  that  the  dealer  will  dis- 
pose of  the  alcohol  to  persons  not  authorized  by  law 
to  use  it.  But  his  premises  are  likely  to  be  of  some  con- 
siderable value;  and,  in  view  of  the  penalties  and  for- 
feiture above  referred  to,  the  chance  that  he  will  do  so 
would  seem  to  be  slight.  Beside,  he  would  probably  not 
proceed  very  far  with  such  illicit  sale  before  being  dis- 
covered by  the  Internal  Revenue  Department. 

Sec.  176. — Manufacturers'  Bond  for  Specially  De- 
natured Alcohol.  (Form  582).  In  order  for  a  manu- 
facturer to  acquire  the  right  to  use  alcohol  which  has 
been  withdrawn  from  bond  free  of  tax  and  denatured, 
he  must,  among  other  things,  give  a  bond,  which,  after 
specifying  the  denaturer  or  dealer  from  whom  such 
alcohol  is  to  be  obtained,  is  conditioned,  in  effect,  that 
the  entire  quantity  of  alcohol  so  obtained  will  be  used 
for  the  purpose  of  manufacturing  the  specified  article 
and  for  no  other  purpose.  In  case  the  alcohol  should 
be  diverted  from  the  specified  purpose,  the  penalty  im- 
posed by  the  bond  is  the  payment  of  the  internal  reve- 
nue tax  of  one  dollar  and  ten  cents  per  gallon  on  all  the 
alcohol  so  diverted.  However  such  diversion  would  be 
a  breach  of  Section  2  of  the  act  and  would  subject  the 


278  INTERNAL  REVENUE  BONDS. 

principal  to  the  penalties  and  forfeiture  therein  speci- 
fied. 

It  would  seem  to  be  highly  improbable  that  any 
bona  fide  manufacturer  (who  must,  of  necessity,  have 
an  equipment  of  some  considerable  value)  would,  for 
the  comparatively  small  profit  he  could  make  out  of  a 
diversion  of  the  alcohol,  lay  himself  open  to  the  penal- 
ties and  forfeiture  provided  by  law.  This  bond  is  the 
one  most  frequently  needed  in  connection  with  dena- 
tured alcohol ;  and  it  would  seem  that  it  might  be  safely 
issued  for  any  manufacturer  legitimately  engaged  in 
the  making  of  an  article  requiring  the  use  of  denatured 
alcohol. 

Sec.  177. — Brewer's  Bond.  Fermented  liquors  are 
subject  to  an  internal  revenue  tax  of  $1.^  on  every 
barrel  of  thirty-one  gallons;  and  every  brewer,  before 
commencing  or  continuing  business,  must  execute  a 
bond  to  the  United  States,  to  be  approved  by  the  In- 
ternal Revenue  Collector,  in  an  amount  equal  to  three 
times  the  amount  of  the  tax  on  the  liquors  brewed  by 
him  during  the  period  of  a  month,  and  conditioned  that 
he  will  "pay  or  cause  to  be  paid,  as  provided  by  law, 
the  tax  required  by  law  on  all  beer,  lager-beer,  ale,  por- 
ter, and  other  fermented  liquors  made  by  him,  or  for 
him,  before  the  same  shall  be  sold  or  removed  for  con- 
sumption or  sale,  except  when  removed  as  provided  by 
law;  and  shall  keep,  or  cause  to  be  kept,  a  book,  in  the 
manner  and  for  the  purpose  specified  by  law,  which 
shall  be  open  to  inspection  by  the  proper  officers  as  by 
law  required;  and  shall  in  all  respects  faithfully  com- 
ply, without  fraud  or  evasion,  with  all  requirements 


INTERNAL  REVENUE  BONDS.  279 

of  law  relating  to  the  manufacture  and  sale  of  any  malt 
liquors."  (R.  S.  Sec.  3336.)  A  new  bond  must  be  ex- 
ecuted once  in  every  four  years;  and  upon  the  execu- 
tion of  a  new  bond,  liability  under  the  former  bond 
terminates,  except  as  to  defaults  committed  during  the 
four  years  it  was  in  force. 

The  payment  of  the  tax  by  brewers  is  not  sur- 
rounded by  so  many  safeguards  as  is  the  case  with  dis- 
tillers,1 there  being  no  specific  lien  on  the  land  and  the 
period  of  imprisonment  not  being  so  long;  but  the  law 
does  provide  that  every  brewer  shall  render  to  the  col- 
lector monthly  a  sworn  statement  of  the  estimated 
quantity  of  liquors  brewed  and  the  actual  quantity 
sold  or  removed,  and  further  provides  that  any  brewer, 
who  attempts  to  evade  the  payment  of  the  tax  on  fer- 
mented liquors  or  who  fails  to  do  any  of  the  things  re- 
quired by  law,  shall  forfeit  all  the  liquors  made  by  him 
or  for  him,  and  all  vessels,  utensils  and  apparatus  used 
in  making  same,  and  shall  be  subject  to  a  penalty  of 
not  less  than  five  hundred  dollars,  and  imprisonment 
for  a  term  not  exceeding  one  year.  (R  S.  Sec.  3340.) 
The  tax  is  required  to  be  paid  by  means  of  stamps 
which  must  be  purchased  from  the  collector  and  affixed 
upon  the  spigot  hole  in  the  head  of  every  receptacle  in 
which  the  liquor  is  contained,  and  the  same  penalty  is 
imposed  for  selling  the  liquor  before  the  receptacle  has 
been  properly  stamped  or  for  using  false  stamps.  (R. 
S.  Sees.  3343-44-46.) 

In  view  of  these  penalties,  and  the  value  of  the 
usual  brewery,  it  would  naturally  be  assumed  that  there 


iSee  Section  164. 


280  INTERNAL  REVENUE  BONDS. 

would  be  few,  if  any,  losses  under  these  bonds ;  and  that 
has  been  the  experience  of  the  companies.  These  bonds 
may  be  executed  for  any  concern  which  is  in  good 
standing  and  has  a  fair  credit  rating  or  which  is  the 
owner  of  the  brewery  and  the  land  upon  which  it  is 
situated,  even  though  the  property  may  be  mortgaged 
for  as  much  as  sixty  per  cent,  of  its  value. 

Sec.  178. — Bond  for  the  Exportation  of  Fermented 
Liquors.  Under  an  act  of  Congress  passed  June  8, 
1890,  the  internal  revenue  tax  need  not  be  paid  on  such 
fermented  liquors  as  shall  be  exported  to  a  place  with- 
out the  jurisdiction  of  the  United  States ;  but,  in  order 
to  get  the  right  thus  to  export  such  liquors  without 
paying  the  tax,  the  brewer  must,  among  other  things, 
give  a  bond  (Form  263)  conditioned  that  as  to  all  fer- 
mented liquor  removed  from  the  brewery  or  other  place 
of  storage  for  exportation,  he  will  comply  with  all  the 
requirements  of  the  said  Act  of  Congress  and  the  regu- 
lations issued  pursuant  thereto;  and  that  he  will  fur- 
nish to  the  Collector  of  Internal  Revenue,  within  ninety 
days  from  the  date  of  such  removal,  satisfactory  evi- 
dence that  said  liquor  has  been  duly  entered  for  ex- 
port and  actually  cleared  for  a  port  or  place  without 
the  jurisdiction  of  the  United  States.  In  case  of  failure 
to  comply  with  the  bond,  the  principal  and  surety  will 
be  liable  for  double  the  amount  of  the  tax  on  the  liquor ; 
but  inasmuch  as  the  liability  accrues  within  ninety 
days,  at  the  end  of  which  time,  the  failure  to  export 
the  liquor  will  become  known,  it  may  be  assumed  that 
no  reputable  brewer  would  try  to  divert  the  liquor  and 
subject  himself  to  probable  fine  and  imprisonment,  and 


INTERNAL  REVENUE  BONDS.  281 

double  the  ordinary  tax.    Such  bond  may  be  issued  for 
any  reputable  brewer  or  brewing  company. 

Sec.  179.— Bond  for  Exportation  of  Specific  Mer- 
chandise under  the  Internal  Revenue  Laws.  We  have 
seen  that  when  distilled  spirits  or  fermented  liquors  are 
exported  from  this  country  no  internal  revenue  tax  is 
required  to  be  paid.  The  same  is  true  of  tobacco,  snu^, 
cigars  and  other  articles  which  are  ordinarily  subject 
to  an  internal  revenue  tax.  Any  manufacturer  en- 
gaged in  the  business  of  exporting  such  merchandise 
from  the  United  States  without  paying  the  tax,  must 
among  other  things,  give  bond  (Form  549)  conditioned 
that  the  articles  so  manufactured  and  removed  for  ex- 
port shall  be  duly  consigned  to  a  collector  of  customs, 
and  shall  upon  the  receipt  thereof  by  such  collector,  be 
entered  for  export  from  the  United  States,  and  that, 
within  90  days  from  the  date  of  each  such  removal  for 
exportation,  he  will  produce  to  the  collector  the  proof 
required  by  the  regulations  of  the  Treasury  Depart- 
ment, showing  that  the  articles  so  removed  have  been 
duly  laden  on  a  foreign  bound  vessel  or  car,  and  that 
the  said  articles  were  actually  cleared  for  a  foreign 
port.  In  the  case  of  all  articles  except  tobacco,  snuff, 
cigars  and  playing  cards,  there  is  an  added  condition 
that  the  principal  shall  produce  satisfactory  evidence 
that  the  articles  have  actually  been  landed  at  a  port 
without  the  jurisdiction  of  the  United  States,  or  that 
after  shipment  they  were  lost  at  sea  without  fraud  or 
negligence  of  the  owner1  or  shipper.  The  obligation  to 
produce  the  proofs  to  the  collector  is  not  a  serious  or 
difficult  matter,  if  in  fact  the  merchandise  has  been  ex- 


282  INTERNAL  REVENUE  BONDS. 

ported.  The  only  danger  is  that  the  principal  will  not 
export  the  merchandise  but  will  divert  it  from  its  sup- 
posed destination,  with  a  view  of  avoiding  the  payment 
of  the  tax,  or  will  have  it  relanded  at  some  other  place. 
In  practice  however  this  has  been  found  not  to  be  a 
serious  risk. 

The  close  supervision  and  vigilance  of  the  Internal 
Revenue  Department  would  probably  make  any  such  at- 
tempt futile,  and  inasmuch  as  it  would  subject  the  man 
making  the  attempt  to  fine  and  imprisonment,  it  is 
hardly  ever  attempted,  especially  when  bond  with  cor- 
porate surety  has  been  given. 

Sec.  180. — Cigar  Manufacturer's  Bond.  A  cigar 
manufacturer  is  required  to  give  a  bond  (Form  71) 
conditioned  that  he  shall  "  comply  with  all  the  require- 
ments of  law  in  regard  to  the  manufacture  of  cigars, 
and  shall  not  engage  in  any  attempt,  by  himself  or  by 
collusion  with  others,  to  defraud  the  Government  of 
any  tax  on  his  manufactures,  and  shall  render  truly 
and  correctly,  all  the  returns,  statements,  and  inven- 
tories prescribed;  and  whenever  he  shall  add  to  the 
number  of  cigar  makers  employed  by  him,  shall  imme- 
diately give  notice  thereof  to  the  collector  of  tjie  dis- 
trict, and  shall  stamp,  in  accordance  with  law,  all  cigars 
manufactured  by  him  before  he  offers  the  same,  or  any 
part  thereof,  for  sale,  and  before  he  removes  any  part 
thereof  from  the  place  of  manufacture,  and  shall  not 
knowingly  sell,  purchase,  expose,  or  receive  for  sale, 
any  cigars  which  have  not  been  stamped  as  required 
by  law."  (R.  S.  Sec.  3387.)  This  bond  must  be  in  a 
sum  of  not  less  than  $2,000.00  nor  more  than  $20,000.00, 


INTERNAL  REVENUE  BONDS.  283 

and  is  continuous,  remaining  in  force  as  long  as  the 
license.  The  only  way  the  bond  can  be  terminated 
while  the  principal  continues  in  business  is  for  the  In- 
ternal Eevenue  Collector  to  check  up  his  stock,  revoke 
his  license,  issue  a  new  one  and  require  a  new  bond. 

The  penalties  provided  by  law,  in  case  of  a  breach 
of  the  bond,  are  imprisonment  for  not  less  than  six 
months  nor  more  than  two  years,  and  forfeiture  to  the 
United  States  of  "all  raw  material  and  manufactured, 
or  partly  manufactured,  tobacco  and  snuff,  and  all  ma- 
chinery, tools,  implements,  apparatus,  fixtures,  boxes, 
barrels  and  all  other  material  which  may  be  found  in 
his  possession  in  his  manufactory  or  elsewhere. "  (R. 
S.  Sec.  3372.) 

In  view  of  this  penalty,,  and  of  the  close  supervi- 
sion exercised  by  the  internal  revenue  officers,  few,  if 
any,  bona  fide  manufacturers  attempt  to  evade  the  in- 
ternal revenue  law;  and  where  an  applicant  for  such 
a  bond  has  enough  money  or  property  to  warant  the 
assumption  that  he  is  acting  in  good  faith  and  bears  a 
good  reputation,  the  bond  may  be  issued. 

Sec.  181.— Tobacco  Manufacturer's  Bond,  Manu- 
facturers of  tobacco  are  required  to  give  a  bond  (Form 
40)  similar  in  tenor  and  effect  to  that  required  to  be 
given  by  a  cigar  manufacturer,  and  the  liability  and 
risk  of  the  surety  are  substantially  the  same. 

Sec.  182. — Tobacco  Peddler's  Bond.  A  tobacco 
peddler,  as  the  name  implies,  is  one  who  goes  about  the 
country  selling  and  immediately  delivering  tobacco  and 
cigars  direct  to  consumers.  In  order  to  prevent  such  a 
peddler  from  handling  tobacco  on  which  the  internal 


284  INTERNAL  REVENUE  BONDS. 

revenue  tax  has  not  been  paid,  lie  is  required,  among 
ether  things,  to  get  a  license  from  the  internal  revenue 
collector  and  give  bond  conditioned  that  he  will  not 
engage  in  any  attempt,  by  himself  or  by  collusion  with 
others,  to  defraud  the  Government  of  any  tax  on  to- 
bacco, snuff  or  cigars ;  that  he  will  neither  sell  nor  offer 
for  sale  any  tobacco,  snuff  or  cigars  except  in  original 
or  full  packages,  as  the  law  requires  the  same  to  be  put 
up  and  prepared  by  the  manufacturer  for  sale,  and  ex- 
cept such  packages  of  tobacco,  snuff  or  cigars  as  bear 
the  manufacturer's  label  or  caution  notice  and  his  legal 
marks  or  brands  and  genuine  internal  revenue  stamps 
which  have  never  before  been  used. 

Inasmuch  as  such  peddlers  go  about  from  place 
to  place,  taking  their  goods  with  them,  it  is  of  course 
impossible  for  the  internal  revenue  officers  to  exercise 
much,  if  any,  supervision  over  them;  and  inasmuch 
as  they  generally  have  little  or  no  property,  except 
perhaps  a  horse  and  wagon,  there  is  really  nothing  to 
prevent  these  peddlers  from  handling  tobacco  on  which 
the  internal  revenue  tax  has  not  been  paid.  However, 
the  law  does  provide  a  penalty  of  fine  up  to  $500  and 
imprisonment  up  to  one  year  for  any  act  that  would 
result  in  a  breach  of  the  bond. 

In  practice  these  bonds  have  been  found  not  to 
involve  much  chance  of  loss.  It  is  not  certain  whether 
this  is  because  the  peddlers  do  not  in  fact  violate  the 
law  or  because  the  violation  is  not  discovered.  In  any 
event  these  bonds  are  considered  desirable  business,  and 
may  be  accepted  whenever  the  investigation  shows  the 
applicant  to  have  a  good  record.  The  bond  is  continu- 


INTERNAL  REVENUE  BONDS.  285 

cms,  but  a  new  license  is  required  each  year,  so  that  if 
the  license  is  not  renewed,  the  bond  may  be  cancelled. 


CHAPTER  XII. 
CUSTOM-HOUSE  BONDS. 

Sec.  183. — In  General.  Many  different  kinds  of 
bonds  are  required  by  the  Treasury  Department  of  the 
Federal  Government,  in  connection  with  the  collection 
of  customs  duties  on  imports.  These  bonds,  for  the  most 
part,  guarantee  the  payment  of  import  duties  on  mer- 
chandise, or  that  the  merchandise  will  be  exported  out 
of  the  country,  or  that  it  will  be  taken  to  another  port 
and  there  entered  for  the  payment  of  duty.  There  are, 
however,  other  miscellaneous  bonds,  which  are  required 
and  given  in  this  connection.  There  are  bonds  which 
guarantee  that  imported  merchandise  will  be  used  for  a 
specific  purpose,  which  renders  it  non-dutiable;  that 
merchandise  will  be  held  pending  an  examination  by  the 
customs  authorities,  or  that  it  will  be  re-delivered  upon 
demand  of  the  collector;  that  certain  specified  docu- 
ments will  be  produced;  that  damages  sustained  by  the 
Government  will  be  paid  and  that  the  Government  will 
be  reimbursed  for  expenses  in  connection  with  the  im- 
portation of  merchandise,  etc. 

It  appears  to  be  a  fact  that  there  have  been  very 
few,  if  any,  actual  losses  under  these  bonds  in  the  past ; 
and  as  a  class  they  impose  on  the  surety  very  little 
actual  hazard,  although  in  some  cases  there  is  consid- 
erable risk,  and  in  a  few  cases  collateral  security  is  nec- 
essary. These  bonds  are  not  specifically  provided  for 
t>y  any  statute,  are  printed  only  in  book  form,  can  be 
•signed  only  at  the  custom  houses,  and  no  copies  are 


CUSTOM-HOUSE   BONDS.  287 

available;  hence  it  is  difficult  for  a  prospective  surety 
to  obtain  information,  in  advance,  as  to  the  nature  of 
any  obligation  of  this  kind  he  may  be  asked  to  assume. 
As  in  the  case  of  internal  revenue  bonds,  it  will  be  my 
purpose  to  refer  briefly  to  such  of  these  bonds  as  are 
in  fairly  general  use,  with  special  reference  to  those 
which  seem  to  involve  some  considerable  chance  of  loss 
and  to  those  on  which  collateral  security  is  necessary. 
Each  form  of  bond  has  been  given  a  catalogue  number 
by  the  Treasury  Department;  and  in  order  to  identify 
the  bond  under  discussion,  the  catalogue  number  will 
be  referred  to. 

In  this  connection,  it  is  to  be  borne  in  mind  that  if 
any  person,  knowingly  and  wilfully,  with  intent  to  de- 
fraud the  revenue  of  the  United  States,  smuggles  or 
clandestinely  introduces  into  the  United  States  any 
goods,  wares,  or  merchandise  subject  to  duty  by  law 
and  which  should  have  been  invoiced,  without  paying 
or  accounting  for  the  duty;  or  makes  out,  passes  or  at- 
tempts to  pass  through  the  custom  house  any  false, 
forged  or  fraudulent  invoice,  every  such  person,  his, 
her  or  their  aiders  and  abettors  will  be  deemed  guilty 
of  a  misdemeanor,  and  on  conviction,  will  be  fined  in 
any  sum  not  exceeding  five  thousand  dollars  or  impris- 
oned for  a  term  not  exceeding  two  years.  (R.  S.  Sec. 
2865.)  Any  act  resulting  in  a  serious  breach  of  a  cus- 
tom house  bond  would  likely  come  within  the  scope  of 
this  law,  and  would  therefore  be  punishable  by  impris- 
onment. The  fear  of  punishment  is  always  a  great 
deterrent,  especially  when  it  is  to  be  meted  out  by  the 
Federal  authorities. 


288  CUSTOM-HOUSE   BONDS. 

Sec.  184.— Warehousing  Bond.  Cat.  No.  3577  and 
3577a.  An  important  and  much  used  class  of  custom- 
house bonds  are  those  required  to  be  given  in  connection 
with  the  storage  of  imported  merchandise  in  bonded 
warehouses.  When  a  man  imports  merchandise,  which 
he  does  not  desire  immediately  to  dispose  of,  he  is  per- 
mitted to  put  it  in  a  public  store  or  a  bonded  warehouse, 
and  is  relieved  of  the  payment  of  duty  until  the  mer- 
chandise is  withdrawn;  provided,  however,  that  it  must 
be  withdrawn,  and  the  duty  paid,  within  three  years. 
Every  importer,  who  thus  puts  imported  goods  in  pub- 
lic store  or  bonded  warehouse,  is  required  to  give  bond 
conditioned  "that  within  three  years  from  the  date  of 
original  importation,  the  merchandise  shall  be  regularly 
and  lawfully  withdrawn  from  public  store  or  bonded 
warehouse,  on  payment  of  the  legal  duties  and  charges 
to  which  they  shall  then  be  subject;  or,  that  at  any 
time  within  three  years  from  date  of  original  importa- 
tion, they  shall  be  so  withdrawn  for  actual  exportation 
beyond  the  limits  of  the  United  States."  As  long  as 
the  merchandise  remains  in  the  warehouse,  it  may  be 
sold  for  the  payment  of  duty ;  and  therefore  there  is  no 
chance  of  loss  as  long  as  the  merchandise  will  sell  for 
enough  to  pay  the  duty.  The  only  danger  is  that  before 
the  goods  are  withdrawn  from  the  warehouse,  the  market 
may  depreciate,  or  the  goods  deteriorate,  to  such  an 
extent  that  they  will  not  bring  the  amount  of  the  duty, 
and  the  surety  may  be  compelled  to  pay  a  duty  which 
is  greater  than  he  can  get  for  the  goods.  The  thing  to 
be  considered  therefore  is  the  probability  that  the  mar- 
ket for  the  goods  will  go  down,  or  that  the  goods  will 


CUSTOM-HOUSE   BONDS.  289 

deteriorate  to  such  an  extent  that  they  will  not  sell  for 
enough  to  pay  the  duty.  If  therefore  the  merchandise 
is  of  a  perishable  nature,  or  if  it  will  retain  its  value 
only  for  a  season  (such  for  example  as  Christmas  goods 
imported  especially  for  the  holiday  season),  there  may 
be  some  risk  on  the  bond;  and  if  the  amount  involved 
is  large,  the  bond  should  not  be  issued  unless  the  ap- 
plicant is  engaged  in  a  well  established  business  and  is 
given  a  satisfactory  rating  by  the  mercantile  agencies. 
However  if  the  goods  should  so  depreciate  in  value  that 
they  are  not  worth  the  duty,  the  owner  can  enter  them 
for  export  and  throw  them  overboard  (R.  S.  See.  3052) 
and  thereby  relieve  himself  of  the  payment  of  duty.  If 
the  surety  will  see  that  this  is  done,  the  maximum  lia- 
bility will  be  the  cost  of  getting  the  goods  out  of  the 
country.  And  in  order  that  the  death  or  incapacity 
of  the  principal  may  not  deprive  the  surety  of  this 
right,  it  is  suggested  that,  in  questionable  cases  and 
where  the  amount  involved  is  large,  a  power  of  attorney 
authorizing  the  surety's  representative  to  make  the 
withdrawal  be  required. 

In  case  of  the  actual  injury  to  or  destruction  of  any 
merchandise  by  accidental  fire  or  other  casualty,  while 
it  remains  in  the  custody  of  the  officers  of  the  customs 
in  any  public  or  private  warehouse  under  bond,  the 
Secretary  of  the  Treasury  is  authorized  to  abate  the 
amount  of  import  duties  accruing  thereon,  so  that  no 
danger  need  be  anticipated  from  this  source. 

Sec.  185. — Bond  for  Warehouse.  Warehouses  in 
which  imported  merchandise  may  be  stored  pending 
the  payment  of  duty,  as  mentioned  in  the  preceding 


290  CUSTOM-HOUSE    BONDS. 

section,  are,  under  the  regulations  of  the  Treasury  De- 
partment, divided  into  eight  classes,  as  follows: 

Class  1.  Stores  owned  or  leased  by  the  United 
States  Government. 

Class  2.  Private  warehouses  occupied  exclusively 
for  storage  of  merchandise  owned  by  the 
proprietor  and  entered  in  bond. 

Class  3.  Warehouses  in  occupancy  of  persons  en- 
gaged in  the  business  of  storing  dutiable 
merchandise  for  hire,  and  used  for  the 
general  storage  of  dutiable  merchandise 
and  of  unclaimed  and  seized  goods. 

Class  4.  Yards,  stables,  sheds  and  stores,  which 
are  used  exclusively  for  the  storage  of 
animals,  wool,  coal,  lumber,  molasses, 
sugar,  iron  and  other  articles,  when 
specifically  authorized. 

Class  5.  Bins  or  parts  of  buildings  used  for  the 
storage  of  imported  grain. 

Class  6.  Warehouses  for  the  manufacture  of  im- 
ported merchandise  intended  for  expor- 
tation, as  provided  for  by  the  tariff  act 
of  July  24,  1897,  Ch.  11  and  the  act  of 
Aug.  5,  1909,  Ch.  6,  S.  23. 

Class  7.     Warehouse  for  smelting  and  refining. 

Class  8.  Warehouse  for  smelting  and  refining  of 
imported  lead-bearing  ores  or  base  bul- 
lion, under  Section  24  of  the  tariff  act  of 
Aug.  5,  1909. 


CUSTOM-HOUSE   BONDS.  291 

The  Government  places  a  customs  officer,  known  as 
a  storekeeper,  in  charge  of  each  of  these  warehouses; 
and  it  his  duty  to  carry  the  keys  to  the  warehouse,  open 
it  in  the  morning,  close  it  in  the  evening  and  see  to  it 
that  no  merchandise  is  withdrawn  except  upon  the  per- 
mit of  the  collector. 

And  the  Government  requires  the  owner  of  each 
warehouse  (except  of  course  those  of  class  1)  to  give 
bond  conditioned  substantially  that  he  will  in  all  respects 
comply  with  the  provisions  and  requirements  of  the 
warehousing  laws  and  the  regulations  of  the  Treas- 
ury Department  relating  thereto,  and  exonerate  and 
hold  the  United  States  and  its  officers  harmless  from 
or  on  account  of  any  risk,  loss  or  expense,  of  any  kind 
or  description,  connected  with  or  arising  from  the  de- 
posit or  keeping  or  transferring  of  imported  merchan- 
dise, including  the  expense  of  any  kind  or  description 
incident  thereto,  or  caused  by  the  transfer  of  merchan- 
dise from  the  warehouse  or  premises  on  the  discon- 
tinuance thereof  as  a  bonded  warehouse;  and  will  also 
pay  to  the  collector,  monthly,  the  salary  of  the  customs 
officer  in  charge  of  said  goods,  wares  and  merchandise; 
and  will  promptly  report  to  the  collector  any  and  all 
damaged  or  perishable  articles  that  may  be  found  in 
said  warehouse;  and  will  not  receive  any  gunpowder 
or  other  dangerous  or  explosive  substances  (except  fire 
crackers)  in  said  warehouse;  and  will  keep  in  repair 
said  warehouse;  and  will  not  remove,  noj  suffer  to  be 
removed,  any  goods,  wares,  or  merchandise  from  the 
warehouse  without  lawful  permit  and  without  the  pres- 
ence of  the  customs  officer  in  charge.  The  language 


292  CUSTOM-HOUSE   BONDS. 

of  the  bond  differs  slightly  in  the  different  cases,  but 
uniformly  it  contains  the  provision  that  the  principal 
shall  not  remove  nor  suffer  to  be  removed  any  goods, 
wares,  or  merchandise,  from  the  warehouse  without  law- 
ful permit  and  without  the  presence  of  the  customs  offi- 
cer ;  and  that  is  the  main  purpose  of  the  bond,  the  other 
obligations  being  incidental  and  not  at  all  likely  to  in- 
volve a  loss  to  the  surety.  And  there  is  practically  no 
probability  that  he  will  permit  any  of  the  merchandise 
to  get  out  of  the  warehouse  without  a  lawful  permit; 
for  in  the  first  place,  the  customs  officer  has  complete 
charge  of  the  warehouse,  and  no  entry  can  be  made 
without  his  consent,  and  he  is  a  bonded  government 
official  who  may  be  expected  to  perform  his  duties.  In 
the  second  place,  a  penalty  of  fine  and  imprisonment  is 
provided  by  law  in  case  any  importer  or  proprietor  of 
a  bonded  warehouse,  fraudulently  or  by  any  contrivance, 
opens  or  gains  access  to  the  warehouse  except  in  the 
presence  of  the  proper  officer  of  customs  (R.  S.  2986), 
or,  in  case  any  warehoused  merchandise  shall  be  fraudu- 
lently concealed  in  or  removed  from  any  warehouse 
(R.  S.  2987).  And  in  the  third  place,  the  principal 
generally  has  considerable  financial  strength.  The  ware- 
house itself,  is  generally  of  quite  considerable  value,  al- 
though, of  course,  it  is  often  mortgaged.  However,  the 
equity  is  usually  sufficient  to  keep  the  owner  straight. 
In  the  case  of  private  bonded  warehouses,  whether  used 
for  storage  only  or  for  manufacturing,  the  owners  are 
often  concerns  of  very  considerable  financial  strength 
and  standing. 

These  bonds,  though  continuous,  are,  as  a  class,  de- 


CUSTOM-HOUSE   BONDS.  293 

sirable  business.  The  insolvency  of  the  principal  would 
not  necessarily,  or  even  likely,  impose  any  loss  on  the 
surety,  for  the  receiver  would  be  required  to  fulfil  the 
obligations  under  the  bond,  and  no  merchandise  could 
be  withdrawn  except  in  the  presence  of  the  storekeeper. 
While  it  is  always  well,  if  possible,  to  avoid  becoming 
surety  for  concerns  which  are  likely  to  become  insolvent, 
yet  I  believe  a  surety  company  would  be  safe  in  execut- 
ing these  bonds  for  practically  all  applicants. 

Sec.  186.— Bond  for  Storage  of  Imported  Tea. 
Cat.  No.  3891.  A  slight  variation  from  the  usual  ware- 
house bond  is  required  in  connection  with  the  importa- 
tion of  tea.  Under  an  Act  of  Congress  of  March  2, 
1897,  entitled  an  "Act  to  Prevent  the  Importation  of 
Impure  Tea,"  all  tea  that  is  brought  into  this  country 
must  be  inspected  and  passed  by  United  States  inspectors 
before  it  will  be  delivered  to  the  importer  for  sale  or 
consumption.  And  nearly  all  tea  importers  maintain 
private  warehouses  for  the  storage  of  imported  tea ;  and, 
pending  the  examination,  they  are  permitted,  by  regula- 
tion, to  remove  the  tea  to  their  warehouses,  provided 
they  shall  first  have  given  bond  conditioned  that  no  such 
tea  shall  be  removed  or  delivered  from  the  warehouse 
except  in  pursuance  of  the  collector's  permit  for  the 
release  of  tea  which  has  been  examined  by  the  United 
States  officers,  under  the  Act  aforesaid. 

The  collector  of  customs  does  not  put  a  storekeeper 
in  charge  of  tea  warehouses,  and  it  is  therefore  physi- 
cally possible  for  the  importer  to  remove  the  tea  without 
waiting  for  the  inspection.  In  practice  however,  this 
is  very  seldom  if  ever  done,  because,  in  the  first  place, 


294  CUSTOM-HOUSE   BONDS. 

it  does  not  cost  anything  to  permit  the  inspection,  and 
therefore  there  is  no  incentive  for  an  honest  importer  to 
attempt  to  evade  the  law;  and,  in  the  second  place,  tea. 
importers,  who  maintain  private  warehouses,  are  gener- 
ally men  of  financial  responsibility  who  cannot  afford 
to  be  dishonest  by  attempting  to  import  impure  tea. 

In  view  of  the  fact  that  the  Government  does  not 
keep  a  storekeeper  at  these  warehouses,  some  companies 
regard  these  bonds  as  involving  considerable  risk,  and 
direct  that  they  be  issued  only  for  concerns  having  ade- 
quate financial  responsibility.  In  practice,  applicants 
for  these  bonds  do  have  financial  responsibility,  and  so 
far  as  I  am  aware,  no  one  has  ever  heard  of  a  loss  under 
a  bond  of  this  kind.  Therefore,  I  think  they  can  safely 
be  executed  for  practically  all  applicants.  As  a  rule, 
the  customs  officers  are  prompt  in  making  the  examina- 
tion of  the  tea,  so  that  liability  under  the  bond  generally 
terminates  within  thirty  or  at  most  sixty  days. 

Sec.  187.— Bond  for  Exportation  of  Impure  and 
Unwholesome  Tea.  Cat.  No.  3893.  We  have  seen  that 
tea  cannot  be  brought  into  this  country,  unless  it  is 
examined  and  approved  by  United  States  inspectors, 
under  an  Act  of  Congress  of  March  2d,  1897,  entitled 
"An  Act  to  Prevent  the  Importation  of  Impure  and 
Unwholesome  Tea."1  When  tea  is  rejected,  as  being 
within  the  prohibitions  of  that  act,  the  owner  is  required 
to  give  a  bond  conditioned  that  the  tea  shall  be  exported 
without  the  limits  of  the  United  States,  within  six 
months,  and  that  evidence  shall  be  produced  to  show 


iSee  Preceding  Section. 


CUSTOM-HOUSE   BONDS.  295 

the  landing  abroad  of  the  merchandise  and  that  all  cus- 
tom-house charges,  which  may  attach  prior  to  the  ex- 
portation, shall  be  paid. 

In  such  cases,  the  importer  generally  has  no  alter- 
native but  to  export  the  tea;  for  the  customs  officials 
keep  supervision  over  it,  so  that  he  probably  could  not 
dispose  of  it  in  this  country  if  he  should  desire  to  do 
so ;  and  the  customs  officers,  of  course,  would  not  permit 
him  to  enter  it  for  export  without  paying  the  custom- 
house charges.  Hence  there  is  very  little  risk  and  these 
bonds  may  be  executed  for  practfcally  all  applicants. 
Liability  terminates  within  six  months. 

Sec.  188.— Transportation  Bond.  Cat.  No.  3765. 
When  imported  merchandise  is  stored  in  a  bonded  ware- 
house, the  owner  may,  during  the  three  year  period  al- 
lowed for  the  payment  of  duty,1  desire  to  take  it  to 
another  port,  and  may  still  want  to  defer  the  payment 
of  duty.  The  regulations  of  the  Treasury  Department 
permit  this  to  be  done,  provided  the  merchandise  be 
transported  *  *  in  bond. ' '  In  order  that  merchandise  may 
be  thus  transported,  it  is  necessary  that  it  be  transported 
by  a  carrier  that  has  been  regularly  designated  as  a 
"common  carrier  for  the  transportation  of  merchandise 
in  bond;"  and  that  the  owner  give  a  bond  conditioned 
that,  within  a  specified  time,  he  will  transport  the  mer- 
chandise, or  cause  it  to  be  transported,  by  such  a  carrier, 
and  that  he  will  deliver  it  to  the  collector  at  the  port 
of  destination,  and  that  due  entry  thereof  will  be  made 
for  re-warehousing,  and  that  he  will,  within  a  time  speci- 


iSee  Section  184. 


296  CUSTOM-HOUSE   BONDS. 

fied,  produce  to  the  collector  at  the  port  of  withdrawal, 
the  certificate  of  the  collector  at  the  port  of  destination, 
that  the  merchandise  has  been  delivered  to  him  accord- 
ing to  law  and  re-warehoused  or  the  duties  thereon  paid ; 
or  failing  to  do  so,  will  pay  to  the  proper  collecting 
officer  of  the  United  States,  at  the  port  of  withdrawal, 
the  amount  of  duties  and  an  additional  duty  of  one  hun- 
dred per  cent. 

When  the  merchandise  is  once  delivered  to  the  ear- 
lier, the  responsibility  of  the  owner  practically  ceases; 
for  his  responsibility  then  becomes  secondary  to  that  of 
the  carrier.  The  risk  the  surety  on  the  bond  of  the 
owner  takes  is  mainly  that  the  principal  will  not  deliver 
the  merchandise  to  the  carrier,  but  will  otherwise  dis- 
pose of  it  in  order  to  avoid  the  payment  of  duty.  How- 
ever the  merchandise,  while  being  transported  from  the 
warehouse  to  the  vessel  or  cars,  is  under  the  supervision 
of  a  customs  officer,  so  there  is  little  chance  for  the  prin- 
cipal to  divert  the  merchandise.  And  inasmuch  as  any 
liability  would  accrue  almost  immediately  upon  the  exe- 
cution of  the  bond,  the  surety  does  not  have  to  run  the 
risk  of  a  serious  change  in  the  financial  condition  of  the 
principal ;  and  that  is  the  real  hazard  involved  in  bonds 
where  the  accrual  of  liability  is  deferred.  Looking  at 
the  matter  from  a  practical  point  of  view,  it  may  be 
said  that  almost  anybody  who  is  engaged  in  a  legitimate 
business  may  be  depended  upon  to  comply  with  the 
condition  of  such  bond,  and  they  may  be  executed  for 
all  applicants.  Bonds  of  this  kind  may  be  cancelled  at 
the  end  of  thirty  days. 


CUSTOM-HOUSE   BONDS.  297 

Sec.  189.— Bond  for  Transportation  and  Exporta- 
tion. Cat.  No.  3837. *  In  many  cases,  merchandise, 
which  is  destined  for  some  point  in  Canada  or  Mexico, 
is  landed  at  one  of  the  ports  in  the  United  States,  and 
is  carried  to  its  ultimate  destination  either  by  rail  or 
by  a  coast  steamer.  In  that  event,  the  payment  of  duty 
is  of  course  not  demanded,  but  the  owner  is  required 
to  give  a  bond  conditioned  that,  within  a  specified  time, 
the  merchandise  will  be  transported  by  a  certain  ship 
or  railroad  company  (which  must  have  been  designated 
as  a  common  carrier  for  the  transportation  of  merchan- 
dise in  bond)  and  exported  to  a  foreign  city;  and  that, 
within  the  same  time,  the  proofs  required  by  law  that 
the  said  condition  has  been  performed  will  be  deposited 
with  the  collector.  The  risk  on  this  bond  is  no  greater 
than  on  a  transportation  bond.2 

Sec.  190. — Bond  of  Carrier  for  the  Transportation 
of  Merchandise  in  Bond.  Cat.  No.  3573.  In  order 
to  obtain  the  right  to  transport  merchandise  ' '  in  bond, ' ' 
a  carrier,  whether  a  railroad  or  a  steamship  company, 
must  secure  a  designation  from  the  Treasury  Department 
and  give  bond  in  the  sum  of  one  hundred  thousand  dol- 
lars, conditioned  that  it  will  "duly  observe  and  faith- 
fully comply  with  the  laws  of  the  United  States  and  the 
regulations  of  the  Treasury  Department  made  in  pur- 
suance thereof,  pertaining  to  the  transportation  and 
safe  delivery  of  merchandise  under  sections  3000-1-5-6 
of  the  Revised  Statutes  and  the  Act  of  June  10,  1880, 


iA  similar  bond  is  that  required  for  transportation  and  exportation 
of  manufactured  tobacco,  (Cat.  No.  3935)  and  that  for  the 
exportation  of  distilled  spirits  (No.  4525.) 

2See  preceding  Section. 


298  CUSTOM-HOUSE   BONDS. 

and  all  acts  relating  thereto ;  and  shall  pay  the  necessary 
expenses  of  such  locks,  seals  and  other  fastenings  as 
may  be  prescribed  by  the  Secretary  of  the  Treasury  for 
securing  the  custody  and  safe  transportation  of  such 
merchandise  in  such  cars,  vessels  and  vehicles,  safes, 
trunks,  or  pouches  as  may  be  authorized  and  used  by 
them  for  that  purpose;  and  shall  also  pay  the  expenses 
of  such  inspectors  as  the  Secretary  of  the  Treasury,  at 
his  discretion,  may  cause  to  be  stationed  at  points  along 
the  routes,  or  upon  any  car,  vessel  or  other  vehicle 
(such  expenses  to  include  the  salary  as  well  as  the 
actual  necessary  traveling  expenses  of  such  inspectors) 
in  such  manner  as  may  be  directed  by  the  Secretary  of 
the  Treasury;  and  shall  without  delay,  transport  and 
make  prompt  report,  by  delivery  of  the  manifest  which 
shall  accompany  the  merchandise,  and  make  safe  delivery 
of  all  merchandise,  as  described  on  each  and  every  entry 
or  manifest  and  in  each  receipt  therefor  executed  by 
the  carrier  or  its  duly  authorized  agents,  delivered  to 
said  carrier  for  transportation  under  the  provisions  of 
the  aforesaid  laws,  or  any  of  them,  to  the  collector  or 
other  proper  officer  of  the  customs,  to  whom  the  mer- 
chandise is  consigned  in  the  manifest,  in  the  manner 
required  by  law  and  the  regulations  aforesaid;  or,  in 
default  of  such  transportation  report  and  delivery, 
shall  pay  to  the  United  States,  as  liquidated  damages,, 
an  amount  equal  to  the  value  of  the  dutiable  merchan- 
dise not  so  transported,  reported  and  delivered,  except 
where  delivery  shall  have  been  made  to  the  ultimate 
consignee  or  owner,  instead  of  to  the  collector  or  other 
proper  officer  of  the  customs,  in  which  case,  an  amount 


CUSTOM-HOUSE   BONDS.  299 

equal  to  twice  the  duties,  together  with  all  costs, 
charges  and  expenses  caused  by  the  failure  to  make 
such  transportation  report  and  delivery,  and  shall  also 
protect  and  save  harmless  the  United  States  from  any 
loss  or  damage  resulting  from  fraud  or  negligence  on 
the  part  of  any  officer,  agent  or  other  person  employed 
by  the  carrier." 

The  language  of  this  bond  has  been  quoted  at 
length  as  the  briefest  and  best  statement  of  the  liability 
and  risk  of  the  surety.  The  essence  of  the  obligation 
is  that  the  carrier  will  safely  transport  the  merchan- 
dise and  deliver  it  to  the  collector  of  customs,  who  is 
named  as  consignee  in  the  manifest.  If  the  carrier  is 
a  railroad,  the  merchandise  is  required  to  be  carried  in 
'  *  bonded  cars ; ' '  that  is,  cars  in  which  only  merchandise 
in  bond  is  carried,  and  which  are  sealed  and  generally 
locked  by  a  customs  officer  at  the  point  of  origin  and 
which  can  legally  be  opened  only  by  a  customs  officer  at 
the  point  of  destination.  So  also  if  the  merchandise  is 
carried  in  a  vessel,  it  is  sealed  by  a  customs  officer,  the 
cost  of  the  locks  and  seals  being  paid  by  the  carrier. 
The  collector  often  assigns  inspectors  along  the  route 
of  railroads  and  on  board  vessels  carrying  bonded  mer- 
chandise; and  the  salary  and  expenses  of  such  inspec- 
tors are  to  be  paid  by  the  carriers.  These  expenses  do 
not  amount  to  much;  and  it  is  improbable  that  a  repu- 
table carrier  will  deliberately  divert  the  merchandise 
from  the  consignee  (the  collector  of  customs),  and  de- 
liver it  to  the  owner  or  other  person.  And  it  is  pro- 
vided by  law  that  in  case  of  an  actual  injury  to,  or 
destruction  of,  any  merchandise  by  accidental  fire  or 


300  CUSTOM-HOUSE   BONDS. 

other  casualty  while  in  transportation  under  bond,  the 
Secretary  of  the  Treasury  has  the  right  to  abate  the 
duty.  (R.  S.  Sec.  2984.)  The  principal  danger  seems 
to  be  from  an  accidental  loss  not  within  the  scope  of  this 
section,  or  a  loss  from  negligence  on  the  part  of  the 
employees  of  the  carrier.  The  chance  of  loss  by  the 
surety  does  not  seem  therefore  to  be  very  great;  and 
the  only  requirement  is  that  the  carrier  shall  be  in 
good  standing  and  in  a  reasonably  good  financial  condi- 
tion. This  bond  is  continuous,  needing  no  renewal. 

Sec.  191. — Bond  for  Cartmen,  Draymen  and  Light- 
erman. Cat.  No.  3855.  We  have  seen  that  in  order 
for  railroad  and  steamship  companies  to  obtain  the 
right  to  transport  merchandise  in  bond  from  one  city 
to  another,  they  must  be  specially  authorized  by  the 
Secretary  of  the  Treasury  so  to  do  and  must  give  bond. 
Likewise  the  regulations  of  the  Department  forbid  that 
merchandise  in  bond  be  carried  from  one  warehouse  to 
another,  or  to  any  other  place,  except  by  draymen  or 
lightermen  who  have  been  licensed  as  such  and  who 
have  given  bond  conditioned  to  perform  their  duties 
acording  to  the  rules  and  regulations  of  the  Treasury 
Department  relative  to  the  lighterage,  cartage  or  dray- 
age  of  goods  in  bond,  and  to  make  good  all  loss  or  dam- 
age that  may  happen  in  the  handling  of  any  goods  from 
vessels  to  bonded  warehouses  or  to  public  stores  or  from 
one  warehouse  to  another  or  to  any  other  place. 

The  obligation  of  conforming  to  the  rules  and 
regulations  of  the  Treasury  Department  is  not  likely 
to  result  in  any  loss  under  the  bond.  The  principal 
danger  is  either  that  some  of  the  packages  will  be  lost 


CUSTOM-HOUSE   BONDS.  301 

in  transit  or  that  the  drivers  will  take  some  of  them. 
However  this  risk  has  not  been  found  to  be  very  great, 
and  any  cartman  or  cartage  company,  in  good  standing 
and  fair  average  financial  condition,  would  be  entitled 
to  this  bond.  If  possible,  it  should  be  arranged  that 
the  drays  for  the  carriage  of  small  packages  be  prop- 
erly screened  so  as  to  prevent  a  theft  or  an  accidental 
loss  of  any  of  the  packages  in  transit.  Where  the  ap- 
plicant is  an  importer,  who  will  handle  only  his  own 
importations,  there  is  practically  no  risk  on  the  bond; 
and  in  that  case,  the  bond  may  be  issued  without  ques- 
tion. 

A  licensed  cartman  is  to  be  distinguished  from  the 
man  who  enters  into  a  contract  with  the  Government, 
at  specified  rates,  for  the  cartage  of  merchandise  in  the 
custody  of  the  Government,  under  Act  of  June  22, 
1874,  Chapter  391,  Section  25.  The  bond  of  such  a 
contractor  covers  all  the  liability  of  a  licensed  cart- 
man, and  in  addition,  obligates  the  principal  to  do  the 
draying  at  the  specified  rates,  whether  it  is  profitable 
or  not.  The  desirability  of  such  a  bond  should  be 
tested  by  the  principles  governing  applications  for  con- 
tract bonds. 

Sec.  192.— Bond  for  redelivery.  Cat.  No.  3775. 
We  come  now  to  a  class  of  bonds  on  which  there  is 
great  danger  of  loss  and  where  the  surety  should  be 
fully  protected  by  collateral  security.  The  law  permits 
certain  articles  to  be  brought  into  this  country  free 
of  duty,  when  they  are  to  be  used  here  only  tempo- 
rarily and  for  purpose  of  exhibition.  In  order  that  the 
payment  of  duty  may  thus  be  avoided,  the  owner  is  re- 


302  CUSTOM-HOUSE   BONDS. 

quired  to  give  bond  conditioned  that  he  will,  within  six 
months,  redeliver  the  article  to  the  collector  of  customs 
at  the  port  of  its  importation  and  furnish  such  proof 
of  its  identity  as  the  Secretary  of  the  Treasury,  by 
regulation,  may  require,  and  enter  the  articles  for  ex- 
portation from  the  United  States,  within  the  said  six 
months.  Although  the  bond,  by  its  terms,  provides 
that  the  article  shall  be  delivered  to  the  collector  at  the 
port  of  its  importation,  it  is  now  permissible  to  export 
the  article  from  any  port  in  the  United  States.  See 
Treasury  Decision  31999. 

This  situation  affords  the  importer  almost  un- 
limited opportunity  to  dispose  of  or  secrete  the  article 
and  refrain  from  either  paying  the  duty  or  exporting 
the  article;  and,  inasmuch  as  the  importers  of  such 
articles  are  generally  foreigners,  who  have  no  other 
property  in  this  country,  collateral  security  to  the  full 
amount  of  the  bond  should  be  required;  and  the  col- 
lateral should  not  be  returned  until  the  surety  is  fur- 
nished with  a  certificate  of  the  collector  that  the  article 
has  been  entered  for  export  and  actually  exported.1 

Sec.  193. — Bond  on  Importation  of  Certain  Animals 
for  Exhibition.  Cat.  No.  3779.  A  similar  bond  is 
necessary  in  the  case  of  the  importation,  free  of  duty, 
of  those  animals  on  which  no  duty  is  required  to  be 
paid  if  they  are  to  be  used  merely  for  purpose  of  ex- 
hibition. The  bond  is  conditioned  that  the  importer 
will,  within  six  months  from  the  date  of  original  im- 
portation, actually  export  the  animals  beyond  the 


iThese  bonds  are  generally  known  as  theatrical  exhibit  bonds. 


CUSTOM-HOUSE   BONDS.  303 

limits  of  the  United  States  and  file  with  the  collector 
the  evidence,  required  by  the  customs  regulations,  of 
such  exportation,  within  ninety  days  thereafter. 

This  law  is  availed  of  principally  by  Canadians 
who  exhibit  their  live-stock  at  our  agricultural  fairs, 
although  it  is  also  taken  advantage  of  by  those  who 
desire  to  exhibit  dogs  and  other  animals  on  the  stage.1 
It  affords  an  excellent  opportunity  to  bring  into  this 
country,  without  paying  duty,  animals  which  are  not  in 
fact  intended  merely  for  exhibition;  and  inasmuch  as 
there  is  an  unlimited  opportunity  to  dispose  of  the  ani- 
mals without  paying  duty,  and  inasmuch  as  such  ex- 
hibitors usually  have  little  or  no  available  financial  re- 
sources in  this  country,  collateral  security  should  be 
required.  In  the  case  of  large  exhibitions  at  our  agri- 
cultural fairs,  a  customs  officer  is  usually  assigned  to 
watch  the  exhibit  while  it  is  here,  and  if  any  animals 
should  be  sold,  (as  is  often  the  case)  the  officer,  as  well 
as  the  purchaser,  will  likely  see  that  the  duty  is  paid. 
If  it  is  not,  the  Collector  of  Customs,  being  informed 
by  the  officer,  would,  no  doubt,  confiscate  at  least 
enough  of  the  remaining  animals  to  pay  the  duty.  In 
such  cases,  the  risk  is  not  as  great  as  when  the  im- 
porter is  left  to  follow  his  own  inclination.  However, 
inasmuch  as  the  principal  in  such  a  bond  is  likely  to  be 
a  foreigner,  from  whom  it  would  be  difficult  to  collect 
any  amount  the  surety  might  be  called  on  to  pay,  it 
would  probably  be  well  not  to  issue  these  bonds  with- 
out collateral  even  where  supervision  will  be  exercised 


iThese  bonds  are  commonly  known  as  theatrical  exhibit  bonds. 


304  CUSTOM-HOUSE   BONDS. 

by  the  customs  officers,  as  such  supervision  will  not 
necessarily  prevent  the  importer  from  disposing  of  the 
stock  and  declining  to  pay  the  duty.  Liability  on  the 
bond  terminates  within  nine  months  from  its  date. 

Sec.  194.— Bond  for  Exhibition  of  Works  of  Art. 
Cat.  No.  3777.  The  tariff  act  of  August  15,  1909,  para- 
graph 715,  provides  that  works  of  art,  when  they  are 
intended  for  exhibition  and  not  for  sale,  may  be  im- 
ported free  of  duty  by  any  State,  or  by  any  society  or 
institution  established  for  the  encouragement  of  the 
arts,  science  or  education;  or  by  any  society  or  associa- 
tion or  for  a  municipal  corporation  for  the  purpose  of 
erecting  a  public  monument.  In  all  such  cases,  the  im- 
porter is  required  to  give  a  bond  conditioned  that  he 
will  not  sell,  expose  for  sale  or  use  any  of  the  articles 
contrary  to  law  and  the  provisions  of  the  customs  regu- 
lations adopted  in  pursuance  thereof. 

The  chance  of  loss  under  this  bond  is  that  the 
name  of  some  such  society  or  institution  will  be  used 
as  a  cloak  to  enable  a  speculator  to  bring  in  free  of 
duty  articles  which  are  intended  for  sale  and  not 
merely  for  exhibition.  The  collector  of  customs  would 
look  very  carefully  to  see  that  the  society  or  institution 
was  not  fictitious,  that  it  was  in  possession  of  a  proper 
place  for  the  permanent  exhibition  of  the  articles  and 
that  the  individuals  who  desire  to  make  the  importa- 
tion are  connected  in  a  proper  official  capacity  with 
the  institution.  And  furthermore,  in  case  of  articles  of 
any  considerable  value,  the  collector  would  retain  super- 
vision over  them  until  they  were  permanently  located. 
The  actual  chance  of  loss  would  therefore  seem  to  be 


CUSTOM-HOUSE   BONDS.  305 

small.  However  this  bond  is  of  unlimited  duration,  for 
if  the  articles  should  be  sold  at  any  time  in  the  future, 
there  would  be  a  breach  of  the  bond.  It  is  doubtful, 
however,  if  the  customs  officers  would  attempt  to  trace 
the  articles,  although  they  are  at  all  times,  subject  to 
examination  by  the  proper  officers  of  customs.  The  prac- 
tice with  regard  to  importations  under  the  act  is  too 
limited  to  admit  of  anything  like  a  definite  statement 
as  to  the  chance  of  loss,  and  it  is  suggested  that  consid- 
erable care  be  exercised  and  that  collateral  be  waived 
only  in  very  clear  cases.1 

Sec.  195.— Lay  Order  Permit  Bond  or  Bond  for  the 
Loading  and  Unloading  of  Vessels  at  Night.  In  a 
proper  case  the  collector  of  customs  will,  upon  the 
arrival  in  port  of  a  vessel  belonging  to  a  line  desig- 
nated as  a  common  carrier  for  the  transportation  of 
merchandise  in  bond,  issue  a  permit  for  the  immediate 
loading  of  the  vessel,  and  will  grant  a  special  license  to 
load  and  unload  at  night.  In  order  to  obtain  such  a 
license,  it  is  necessary,  among  other  things,  that  a  bond 
be  given,  the  condition  of  which  is  that  the  principal 
shall  indemnify  the  United  States  and  the  collector 
from  all  losses  and  liabilities  which  may  occur  by  rea- 
son of  the  granting  of  the  license ;  and  shall  pay  to  the 
collector  promptly  a  sum  sufficient  to  reimburse  the 
Government  for  the  services  of  the  inspector  or  other 
customs  officers  and  employees  in  connection  with  the 
loading  or  unloading  of  the  vessel  at  night,  on  Sundays 


iThis  bond  will  probably  become  obsolete,  or  nearly  so,  under  the 
new  tariff  act  of  1913,  which  puts  practically  all  works  of  art 
on  the  free  list. 


306  CUSTOM-HOUSE   BONDS. 

or  holidays.  (R.  S.  Sec.  2871  and  Act  Feby.  13,  1911, 
Ch.  46,  Sec.  6.) 

This  bond  may,  like  many  other  custom-house 
bonds,  be  given  for  a  period  of  six  months;  that  is,  to 
cover  the  loading  and  unloading  of  all  vessels  that  may 
be  consigned  to  the  principal  during  that  period.  And, 
under  the  Act  of  February  13th,  1911,  it  is  not  neces- 
sary for  each  particular  steamship  company  to  give  the 
bond.  One  bond  may  be  given  to  apply  to  all  vessels 
consigned  to  the  principal  or  for  which  the  principal 
shall  act  as  owner,  agent  or  consignee, — thus  enabling 
steamship  agents  to  give  one  bond  for  all  lines  repre- 
sented. 

It  is  difficult  to  see  how  any  loss  or  liability  could 
be  incurred  by  the  United  States  or  the  collector  by 
reason  of  the  granting  of  the  license ;  and  such  liability 
has  seldom,  if  ever,  occurred.  The  matter  of  paying 
for  the  services  of  the  inspector,  in  connection  with  the 
loading  or  unloading  at  night  and  on  Sundays  and  holi- 
days, is  a  small  expense  which,  it  is  believed,  has  uni- 
formly been  paid  without  resort  to  the  surety,  as  it 
accrues  at  once.  It  has  been  the  custom  to  issue  this 
bond  for  any  regular  transportation  line;  and  since 
there  is  no  record  of  a  loss  under  one  of  these  bonds, 
there  would  seem  to  be  no  objection  to  issuing  them  in 
the  name  of  the  agent,  although  it  would  be  well 
enough  to  look  up  the  matter  of  the  authority  of  the 
agent  to  represent  the  lines  mentioned  in  the  bond. 

Sec.  196.— Bond  for  Redelivery  of  Unexamined 
Packages  under  Section  2899  of  the  Revised  Statutes 
or  the  Act  of  June  30,  1906,  or  Both.  Cat.  Nos.  3385, 


CUSTOM-HOUSE   BONDS.  307 

3389,  3393.  When  there  is  an  importation  of  any  con- 
siderable number  of  packages  of  the  same  kind,  which 
come  within  the  scope  of  the  Pure  Food  Law  (Act 
June  30,  1906)  or  of  Section  2899  of  the  Revised  Stat- 
utes of  the  United  States,  or  both,  and  are  therefore 
to  be  examined  and  appraised  by  the  customs  ap- 
praisers, the  Collector  usually  designates  some  of  the 
packages  for  appraisement,  and  permits  the  importer 
to  remove  the  others.  He  will  however  require  the  im- 
porter to  give  a  bond  conditioned  that  he  will  redeliver 
the  packages,  upon  demand,  within  ten  days  after  the 
packages  so  designated  for  examination  shall  have  been 
appraised  and  reported  to  the  Collector,  and  also  that, 
in  the  meantime,  none  of  the  packages  delivered  as 
aforesaid  shall  be  opened  without  the  written  consent 
of  the  collector  or  surveyor,  and  then,  in  the  presence 
of  an  inspector  of  customs. 

If  the  appraisers  find  the  packages  which  they  ex- 
amine to  be  different  from  what  they  expected  to  find, 
they  may  require  that  the  other  packages  be  re- 
delivered  for  examination.  In  practice,  the  collector 
permits  only  importers  of  good  standing,  and  whose 
goods  are  well  known,  to  remove  any  of  them  without 
previous  examination  and  appraisement;  and  the  result 
is  that  seldom,  if  ever,  does  the  collector  find  it  neces- 
sary to  recall  packages  that  have  been  delivered.  The 
demand  for  redelivery  must  be  made,  if  at  all,  within 
ten  days,  so  that  liability  terminates  at  the  end  of  that 
period.  Such  bonds  are  commonly  known  as  "ten  day 
bonds;"  and  a  separate  bond  may  be  given  for  each 
importation,  or  one  bond  may  be  given  to  cover  all 


308  CUSTOM-HOUSE   BONDS. 

importations  during  a  period  of  six  months.  (Cat. 
Nos.  3387,  3391,  3395.)  These  bonds  may  be  issued  for 
all  applicants. 

Sec.  197. — Bond  on  Export  of  Imported  Merchan- 
dise with  Benefit  of  Drawback.  Cat.  No.  4483.  When 
merchandise  is  imported  into  this  country  and  then 
exported,  whether  in  the,  same  form  or  in  a  form  to 
which  it  has  been  changed  by  a  process  of  manufac- 
ture, the  duty  that  was  paid  on  its  importation  will  be 
refunded,  provided  the  merchandise  has  never  left  the 
custody  of  the  customs  officers,  and  provided  certain 
other  conditions  are  complied  with.  The  owner  must 
however  give  a  bond  conditioned  that  the  merchandise 
shall  not  be  re-landed  in  any<  port  or  place  within  the 
limits  of  the  United  States  and  that  the  certificates  and 
other  proofs  required  by  law,  of  the  delivery  of  the 
same  at  a  place  without  the  limits  of  the  United  States, 
shall  be  produced  within  a  specified  time.  The  most 
usual  case  that  comes  within  the  scope  of  this  regula- 
tion is  when  raw  materials  are  imported,  placed  in  a 
bonded  warehouse,  and  there  manufactured  into  a  fin- 
ished product  and  exported, — such  exportation  being 
known  as  exportation  with  benefit  of  drawback,  that  is, 
with  the  right  to  obtain  a  refund  of  the  duty. 

The  risk  under  this  bond  is  that  the  principal  will 
take  the  merchandise  to  another  port  and  enter  it  free 
of  duty,  on  the  ground  that  it  is  of  American  manu- 
facture. But  the  warehouse  is  in  charge  of  a  Govern- 
ment storekeeper,  who  keeps  close  supervision  over  the 
goods,  so  it  is  hardly  possible  for  the  principal  to  vio- 
late the  condition  of  this  bond.  Furthermore,  it  is 


CUSTOM-HOUSE   BONDS.  309 

hardly  reasonable  to  suppose  that  a  man  who  is  regu- 
larly engaged  in  a  manufacturing  business,  with  capi* 
tal  invested,  would  be  likely  thus  to  try  to  evade  the 
payment  of  duty  when  he  knows  that  he  will  certainly 
be  discovered  at  the  end  of  the  time  within  which  he  is 
under  obligation  to  produce  the  documents  showing  the 
landing  of  the  merchandise  abroad,  and  be  compelled 
to  pay  the  duty  and  suffer  the  penalty  of  imprison- 
ment provided  by  law.  (R.  S.  Sec.  3049.) 

These  bonds  may  be  discharged  only  by  producing 
within  the  year,  if  the  exportation  is  made  to  Europe 
or  America,  or  within  two  years,  if  made  to  any  part 
of  Asia  or  Africa,  a  certificate  of  the  consignee  at  the 
port  of  destination  particularly  describing  the  articles 
so  exported  and  their  actual  contents  and  declaring  the 
name  of  the  vessel  from  which  the  same  were  received; 
and  where  the  merchandise  is  consigned  to  a  person 
on  board  the  vessel,  a  certificate  from  the  person  to 
whom  the  merchandise  may  be  sold  and  delivered  may 
be  produced  with  the  same  effect  as  the  certificate  of 
the  consignee  at  the  port  of  destination.  (R.  S.  Sec. 
3044.) 

In  addition  to  such  certificate,  it  is  necessary  to 
produce  a  certificate  of  the  American  Consul  at  the 
port  of  destination  declaring  that  the  certificate  of  the 
consignee  is  true  to  his  knowledge  or  that  it  is  deserv- 
ing of  full  faith  and  credit.  It  is  also  necessary  that 
the  certificate  of  the  consignee  and  the  consul  be  con- 
firmed by  the  oath  of  the  master  and  mate  or  other 
persons  named  in  the  statute.  (R.  S.  Sec.  3045.) 

The  production  of  these  certificates  is  not  a  matter 


310  CUSTOM-HOUSE   BONDS. 

that  should  concern  the  surety.  If  in  fact  the  merchan- 
dise was  landed  at  the  foreign  port,  it  is  not  generally 
difficult  to  satisfy  the  Treasury  Department,  although 
there  may  be  a  technical  defect  in  the  certificates.  Ac- 
cordingly, this  bond  may  be  issued  for  all  applicants 
who  are  engaged  in  business  and  are  in  good  standing. 

Sec.  198. — Bond  for  Examination  and  Appraise- 
ment of  Machinery  at  Place  of  Delivery  or  Destination. 
Cat.  No.  3401.  In  cases  where  very  large  and  cumber- 
some machinery  is  imported,  the  collector  of  customs, 
instead  of  having  it  sent  to  the  appraiser's  store  to  be 
appraised,  may  permit  it  to  be  sent  directly  to  the  fac- 
tory or  plant  where  it  is  to  be  used ;  and,  after  it  is  set 
up  there,  the  appraisers  will  go  there  and  appraise  it. 
In  such  cases,  the  importer  is  required  to  give  a  bond 
conditioned  that  the  machinery  shall  be  promptly  set 
up  at  the  place  of  delivery  or  destination,  at  the  risk 
and  expense  of  the  principal,  and  that  due  notice  there- 
of be  given  in  writing  to  the  collector  within  ninety 
days  in  order  that  examination  and  appraisement  of 
the  same  may  be  completed,  and  that  the  principal 
shall  pay  to  the  United  States  all  duties  and  charges 
that  may  be  found  due  on  said  machinery,  including 
expenses*  incurred  by  the  person  or  persons  designated 
to  examine  and  appraise  the  same,  and  that  he  shall 
accept  the  examination  and  appraisement  as  in  all  re- 
spects binding  and  valid.  (Cat.  No.  3401.)  There  is 
little  risk  on  this  bond  because  such  machinery  cannot 
well  be  secreted  or  disposed  of,  so  that  the  lien  of  the 
United  States  for  the  duty  could  under  almost  any  cir- 
cumstances be  enforced,  without  resort  to  the  bond. 


CUSTOM-HOUSE   BONDS.  311 

The  Collector  of  Customs  is  prompt  in  making  demand 
for  payment  and  there  is  little  or  no  chance  that  the 
owner  will  have  much  opportunity,  or  will  attempt,  to 
evade  it;  and  if  he  should  become  incapacitated  or  un- 
able to  pay,  the  machinery  could  likely  be  sold  for 
enough  to  pay  the  duty.  This  bond  may  likewise  be 
issued  for  all  applicants  who  are  in  business  and  in  good 
standing. 

Sec.  199. — Miscellaneous  Custom-House  Bonds. 
While  we  have  considered  the  bonds  most  frequently 
needed  in  connection  with  the  importation  of  merchan- 
dise, as  well  as  those  on  which  collateral  security  is  nec- 
essary, yet  I  have  not,  by  any  means,  mentioned  all  the 
different  kinds  of  bonds  that  may  be  required  in  this 
connection.  For  example,  the  regulations  of  the  Treas- 
ury Department  require  that  when  dutiable  merchan- 
dise is  sent  to  this  country,  the  invoice  must  be  certified 
in  triplicate  by  the  United  States  Consul  nearest  the 
port  from  which  the  merchandise  is  sent,  and  that  the 
Consul  must  send  a  certified  copy  to  the  collector  of 
customs  at  the  port  to  which  the  merchandise  is  des- 
tined. And  whenever,  from  a  change  of  the  destina- 
tion of  the  merchandise  after  the  production  of  the  in- 
voice to  the  consul,  or  from  other  cause,  the  authenti- 
cated invoice  is  not  received  by  the  collector  at  the  port 
where  the  merchandise  actually  arrives,  the  collector 
may  nevertheles  permit  the  consignee  to  make  entry  of 
the  merchandise  upon  paying  duty  on  the  basis  of  an 
appraised  value  fixed  by  the  customs'  appraisers,  and 
giving  bond  conditioned  that  he  will  "within  six 
months,  produce  to  the  collector  of  customs  a  duly  au- 


312  CUSTOM-HOUSE   BONDS. 

thenticated  invoice  of  the  goods,  and  pay  to  the  col- 
lector the  amount  of  duty  to  which  it  shall  appear,  by 
such  invoice,  the  goods;  are  subject  over  and  above  the 
amount  of  duties  estimated  on  the  appraisement  of  said 
goods. "  (Cat.  No.  3379a.)x  So  there  is  the  bond  to 
produce  a  certificate  of  exportation  of  American  pro- 
ducts, (Cat.  No.  3397)  to  produce  a  certain  declaration 
of  the  foreign  exporter  of  domestic  products,  (Cat.  No. 
3399)  to  produce  a  certain  declaration  of  the  absent 
owner  of  imported  merchandise,  (Cat.  No.  3383)  to 
produce  certificate  of  origin  of  merchandise  from  the 
Philippine  Islands,  and  other  similar  bonds  to  produce 
documents  (Cat.  No.  3375). 

Now  the  purpose  of  producing  such  documents  is 
to  determine  whether  or  not  the  merchandise  is  duti- 
able or  whether  the  proper  amount  of  duty  has  been 
paid.  In  practice  the  customs  officers  rarely  let  an 
article  get  by  unless  the  proper  duty  has  in  fact  been 
paid,  so  that  the  bond  is  a  mere  form,  which,  however, 
must  be  given  in  compliance  with  law  and  regulations. 
The  production  of  the  document  is  ordinarily  only  a 
matter  of  detail,  and  if  it  should  be  difficult  or  impos- 
sible, by  reason  of  death  or  otherwise,  the  Treasury  De- 
partment will  generally  waive  its  production. 

There  is  another  large  class  of  bonds  required  upon 
the  entry  of  merchandise,  or  upon  its  withdrawal  from 
bond  for  a  special  purpose  which  admits,  free  of  duty, 
merchandise  ordinarily  dutiable.  There  is  the  bond  for 
the  withdrawal  of  salt  for  curing  fish  (Cat.  No.  3743)  ; 


iThis  bond  practically  takes  the  place  of  Cat.  Nos.  3379  and  3381. 


CUSTOM-HOUSE   BONDS.  313 

for  the  withdrawal  of  supplies,  for  a  vessel  clearing 
coastwise  (cat.  No.  3879) ;  for  the  entry  or  withdrawal 
of  materials  for  construction  or  repair  of  vessels  or  of 
their  machinery  under  Section  5  of  the  Act  August  24, 
1912  (Cat.  No.  3755).  In  all  such  cases  the  collector  is 
well  satisfied,  before  he  permits  the  merchandise  to  be 
entered  or  withdrawn  from  bond,  that  it  will  in  fact 
be  used  for  the  stated  purpose,  and  makes  very  little  or 
no  subsequent  investigation.  "Where  the  quantity  is 
unusual  or  there  is  anything  to  excite  suspicion,  inves- 
tigation is  made  in  advance. 

In  general  it  may  be  said  that  with  the  exceptions 
noted,  custom-house  bonds  involve  very  little  or  no 
actual  risk  and  that  they  may  be  executed  with  con- 
siderable freedom, — practically  for  all  applicants.  In- 
deed, it  is  the  very  general  policy  of  the  companies  to 
waive  formal  applications  and  sign  these  bonds  upon 
the  mere  request  of  the  importer  or  even  of  the  custom 
house  broker.  And  these  bonds  are  needed  so  fre- 
quently, and  the  amount  involved  and  the  individual 
premiums  so  small  that  it  hardly  pays  an  agent  to  go  to 
the  Custom-House  so  often  to  sign  the  bonds,  unless,  of 
course,  he  is  handling  a  large  volume  of  the  business. 
Accordingly  some  of  the  companies  give  to  the  custom- 
house broker  or  to  the  importer  a  power  of  attorney 
authorizing  him  to  sign  the  bonds  on  behalf  of  the 
company.  In  practice  this  works  out  satisfactorily 
and  enables  a  company  to  handle  a  line  of  business  on 
which  there  are  no  losses,  but  which  could  not  other- 
wise be  profitably  handled.  It  is  of  course  unnecessary 
to  add  that  some  discretion  must  be  used  in  selecting 


314  CUSTOM-HOUSE   BONDS. 

the  persons  to  whom  such  powers  of  attorney  shall  be 
issued. 

In  this  connection  it  may  be  well  to  call  attention 
to  the  fact  that  provision  is  constantly  being  made  by 
the  Treasury  Department  for  new  kinds  of  bonds,  and 
to  suggest  that  any  such  new  bonds,  or  bonds  not  re- 
ferred to  in  this  chapter,  be  examined  to  see  that  they 
involve  no  particular  hazard.  The  principal  point  is  to 
look  out  for  bonds  which  partake  of  the  nature  of 
"theatrical  exhibit  bonds,"  that  is  to  say,  which  pro- 
vide for  redelivery  to  the  collector  of  customs  of  mer- 
chandise which  has  been  turned  over  to  the  importer, 
free  from  the  control  of  the  officers  of  customs,  and  on 
which,  if  not  so  redelivered,  an  import  duty  is  pay- 
able.2 


2See  Sections  192-193. 


CHAPTER  XIII. 
INDEMNITY  TO  SURETY. 

Sec.  200. — Scope.  In  receiving  application  for 
bonds  it  will  often  happen  that  the  applicant,  as  an  in- 
ducement to  the  surety  company  to  execute  the  bond, 
will  offer,  in  addition  to  his  own  indemnity,  the  indem- 
nity of  a  third  person,  firm  or  corporation;  that  is  to 
say,  will  offer  to  have  such  third  person,  firm  or  cor- 
poration agree,  by  instrument  in  writing  under  seal, 
to  indemnify  the  surety  against  loss,  that  is,  to  pay  any 
sum  for  which  the  surety  may  become  liable,  including 
costs,  expenses  and  counsel  fees. 

Sec.  201.— The  Unreliability  of  Personal  Indem- 
nity. While  the  companies  very  frequently  accept  and 
indeed  require  personal  indemnity,  yet  it  has  been 
found  to  be  very  unreliable,  and  very  little  faith  or 
dependence  ought  to  be  put  in  it.  One  company  re- 
ports that,  in  making  a  partial  examination  into  the 
causes  of  its  losses  during  the  year  1912,  it  found  that 
more  than  $37,000.00  was  directly  attributable  to  the 
acceptance  of  bonds  on  the  faith  of  personal  indemnity, 
which  was  thought  to  be  good,  but  which  turned  out 
to  be  worthless  or  nearly  so.  The  president  of  this 
company  says  "Indemnitors  are  still  costly,  and  we  pay 
dearly  for  accepting  business  otherwise  objectionable 
relying  on  them."  The  objections  to  personal  indem- 
nity, and  the  things  that  make  it  unreliable,  may  be 
summarized  as  follows: 


316  INDEMNITY  TO  SURETY. 

1.  An  indemnitor  generally  signs  the  agreement 
on  the  assumption  that  the  principal  will  perform  the 
obligation;  and  when  trouble  comes,  the  indemnitor  is 
slow  to  live  up  to  his  obligation.    He  generally  argues 
that  the  surety  company  was  paid  for  taking  the  risk 
and  that  the  surety  company  ought  not  to  look  to  him, 
who  received  no  compensation.     He  overlooks  the  fact 
that  the  surety  company  was  not  paid  for  taking  any 
risk,  but  merely  for  the  use  of  its  name  and  credit,  and 
that  he  stood  sponsor  for  the  principal,  and  that  it  was 
on  the  faith  of  his  guarantee  that  the  bond  was  writ- 
ten.     It   therefore   seldom   happens   that   indemnitors 
live  strictly  up  to  their  obligations;  and  in  many  cases 
it  is  necessary  for  the  surety  company  to  advance  the 
money    and    sue    the    indemnitor    for    reimbursement. 
This  makes  the  business  unprofitable,  and  furthermore 
it  is  quite  probable  that  in  such  a  suit  the  indemnitor 
will  escape.     Such  a  bond  of  indemnity,  being  given 
without  compensation  by  an  individual  in  favor  of  a 
compensated  surety  company,  will,  in  accordance  with 
the  old  rule  for  the  construction  of  contracts  of  surety- 
ship, be  strictly  construed  in  favor  of  the  indemnitor, 
whereas  the  bond  of  the  surety  company  will  likely  be 
construed  liberally  in  favor  of  the  obligee,  so  that  the 
surety  company  may  be  held  liable  while  the  indemni- 
tor escapes. 

2.  The  indemnitor  may  die  and  his  estate  be  dis- 
tributed to  his  heirs,  or  he  may  move  to  parts  unknown 
before  liability  accrues. 

3.  When  liability  acrues  the  indemnitor  may  be 


INDEMNITY  TO  SURETY.  317 

insolvent  or  unable  to  meet  the  obligation.  This  is  a 
frequent  occurrence. 

4.  The  indemnitor  is  likely  to  learn,  before  the 
surety  company,  of  the  approach  of  trouble  and  dispose 
of  his  property  and  make  himself  "  execution  proof. " 

Sec.  202. — When  Bonds  may  be  Issued  on  the 
Strength  of  Indemnity.  In  view  of  the  reliability  of 
personal  indemnity,  it  is  manifest  that  very  little  de- 
pendance  can  be  put  in  it;  and  the  following  rules 
are  suggested  for  the  guidance  of  underwriters,  who 
are  so  often  requested  to  issue  bonds  on  personal  in- 
demnity. 

1.  A  bad  risk,  that  is  a  risk  which  is  distinctly 
below  the  standard,  should  never  be  accepted  on  the 
strength  of  personal  indemnity.    In  cases  which  are  on 
the  border  line — where  there  is  some  doubt  about  the 
applicant's  ability  to  perform  the  obligation  guaran- 
teed, or  where  it  is  impossible  or  inconvenient  to  get 
full  information — the  risk  may  sometimes  be  accepted 
on    personal    indemnity,    where    the    indemnitors    are 
found,  upon  a  verification  of  their  financial  statements, 
to  be  worth  in  net  available  assets  subject  to  execution, 
an  amount  equal  to  two  or  three  times  the  amount  of 
the  bond. 

2.  Where  the  deficiency  of  the  applicant  is  in 
financial  resources — as  where  a  contractor  has  not  the 
necessary  funds — the  risk  should  not  be  accepted  on 
the  indemnity  of  third  persons,  unless  such  persons  are 
able  and  have  agreed,  by  loans  or  endorsements,  to  make 
up  the  deficiency. 


318  INDEMNITY  TO  SURETY. 

3.  Credit  guarantees,  or  bonds  directly  guarantee- 
ing the  payment  of  money,  should  not  in  any  event  be 
accepted    on    the    strength    of    personal    indemnity, 
although  of  course  there  is  no  objection  to  the  accept- 
ance of  personal  indemnity  in  cases  where  the  appli- 
cant seems  to  be  strong  enough  financially  to  warrant 
the  execution  of  the  bond.   No  matter  how  strong  the 
indemnitors  may  be,  the  chances  are  ten  to  one  that 
the  surety  company  will  have  to  pay  the  money  and 
look  to  the  indemnitors  for  reimbursement;  and  that 
as  we  have  seen,  makes  the  business  unprofitable,  and 
involves  considerable  chance  of  loss. 

4.  Personal  indemnity  is  particularly  unreliable 
where  the  bond  will  continue  in  force  for  a  consider- 
able period  of  time;  and  it  is  suggested  that  where  the 
obligation  covers  as  much  as  two  years,  the  bond  should 
not  be  accepted  on  personal  indemnity  even  though  the 
bond  may  be  on  the  border  line.     However,  where  it 
is  deemed  prudent  regardless  of  indemnity,  to  accept 
such    long-term    guarantees    without    collateral,    it    is 
nevertheless  always  advisable  to  get  as  much  indemnity 
as  possible  and  from  as  many  different  persons  as  pos- 
sible; for  if  the  principal  should  fail,  it  may  be  that 
some  one  of  the  indemnitors  will  be  alive  and  solvent 
at  the  end  of  the  period.     In  such  cases  the  personal 
indemnity  should  be  taken  only  with  caution  and  should 
not  be  made  the  excuse  for  the  acceptance  of  a  poor 
risk. 

Sec.  203.  The  Enforceability  of  Indemnity  Bonds. 
When  the,  indemnity  of  a  person,  firm  or  corporation, 
other  than  the  applicant,  is  offered,  it  is  important,  be- 


INDEMNITY  TO  SURETY.  319 

fore  executing  the  bond,  to  know  that  the  indemnity 
is  valid  and  enforceable,  so  that,  if  the  indemnitors 
are  solvent,  recovery  may  be  had.  This  is  quite  im- 
portant, for  there  is  grave  doubt  about  the  validity 
of  much  of  the  indemnity  that  is  offered  to  surety 
companies. 

In  the  first  place,  there  is  the  perplexing  question 
as  to  the  validity  of  such  a  bond  of  indemnity  when 
executed  by  a  corporation,  other  than  a  surety  com- 
pany. It  is  the  rule  that  a  corporation  can  do  only 
those  things  which  are,  either  expressly  or  by  necessary 
implication,  authorized  by  its  charter;  and  it  is  most 
unusual  for  an  ordinary  business  corporation  to  be 
expressly  authorized  by  its  charter  to  become  surety 
or  guarantor  for  another;  and  it  is  hardly  within  the 
scope  of  any  business  to  become  surety  for  others. 
Applying  strict  legal  principles,  the  conclusion  would 
be  inevitable  that  a  bond  of  indemnity  executed  by  such 
a  corporation  would  be  unenforceable.  Such  a  strict 
application  of  legal  principles  would,  of  course,  lead 
to  many  hardships  and  much  fraud;  and  the  courts 
of  nearly  all  the  States  now  apply,  to  some  extent  at 
least,  what  is  known  as  the  estoppel  doctrine.1  In 
applying  this  doctrine  the  courts  almost  universally 
hold  that  where  the  corporation  has  received  the  bene- 
fit of  a  contract  which  has  been  executed  by  the  other 
party,  it  will  be  estopped,  while  retaining  the  benefits, 
to  deny  its  corporate  power  to  execute  the  contract ;  and 


iThis  doctrine  appears  to  be  denied  in  Alabama  (Chewala  Lime 
Works  vs.  Dismukes,  87  Ala.,  344.)  and  in  Illinois,  (Best  Brewing  Co. 
vs.  Klassen,  185  III.,  37.) 


320  INDEMNITY  TO  SURETY. 

1 

therefore,  where  the  corporation,  which  offers  to  exe- 
cute the  bond  of  indemnity,  will  receive,  or  may  be 
expected  to  receive,  substantial  financial  benefits  from 
the  execution  of  the  bond  by  the  surety  company,  it  is 
fair  to  assume  that  a  bond  of  indemnity,  executed  by 
the  corporation  in  consideration  of  the  execution  of  the 
bond  by  the  surety  company  would  be  held  valid.  It  is, 
however,  most  important  to  recite  in  the  bond  of  in- 
demnity the  facts  showing  the  benefit  to  be  derived  by 
the  corporation  from  the  execution  of  the  bond  by  the 
surety  company.  It  is  not  enough  to  recite  that  the 
bond  was  executed  at  the  request  of  the  corporation,  or  >L^^ 
that  the  corporation  has  "an  interest "  in  the  transac- 
tion; facts  should  be  stated  showing  just  what  the  in- 
terest of  the  corporation  is  and  how  it  expects  to  be 
benefitted  by  the  execution  of  the  bond  by  the  surety 
company. 

The  courts  of  some  of  the  States  have  gone  a 
step  further  and  have  held  that  where  a  contract,  which 
is  ultra  vires  as  to  one  of  the  parties,  has  been  performed 
by  the  other  party,  whether  the  first  party  has  received 
any  benefit  therefrom  or  not,  the  first  party  will  be 
estopped  to  deny  its  power  to  make  the  contract.  The 
contract  between  the  surety  company  and  the  indemnitor 
consists  of  a  promise,  on  the  part  of  the  surety  company 
to  execute  a  bond,  in  consideration  of  a  promise  on  the 
part  of  the  indemnitor  to  protect  it  from  loss.  When 
therefore,  the  surety  company  executes  the  bond,  it 
performs  its  part  of  the  contract;  and  where  this  rule 
is  in  force,  the  indemnitor  corporation  would  be  estopped 


INDEMNITY   TO   SURETY.  321 

to  deny  its  power  to  execute  the  bond  of  indemnity, 
whether  it  had  received  any  benefit  from  the  transaction 
or  not.  While  the  general  doctrine  has  been  annonuced 
in  nearly  all  the  States,  yet  it  has  not  often  been  applied 
in  such  a  flagrant  case  as  where  the  corporation  has 
become  an  accommodation  surety  or  guarantor  for 
another;  and  it  is  by  no  means  certain  that  this  rule 
will  universally  be  applied  in  those  eases.  As  a  rule 
it  is  not  well  to  rely  upon  bonds  of  indemnity  executed 
by  corporations,  unless  the  corporation  will  derive,  or 
expects  to  derive,  a  substantial  financial  benefit  from 
the  execution  of  the  bond  by  the  surety  company,  and 
unless  the  facts  showing  that  such  benefit  will  be  derived 
are  recited  in  full  in  the  bond  of  indemnity. 

In  the  second  place,  a  member  of  a  co-partnership, 
on  hehalf  of  the  firm,  will  sometimes  offer  to  give  a 
bond  of  indemnity.  Such  a  bond  will  bind  the  firm 
only  when  the  giving  of  the  bond  is  written  the  scope 
of  the  partnership  business,  and,  as  we  have  seen,  it  is 
hardly  within  the  scope  of  any  business  to  become 
surety  or  guarantor  for  others.  If  the  execution  of  the 
bond  by  the  surety  company  will  advance  the  interests 
of  the  firm,  along  the  lines  of  the  business  in  which  it  is 
engaged,  and  may  be  expected  to  produce  some  finan- 
cial reward  for  the  firm,  an  indemnity  bond  executed 
on  behalf  of  the  firm,  by  one  of  the  members,  would 
perhaps  be  enforceable.  But,  as  a  general  proposition, 
it  is  wise  to  rely  upon  the  indemnity  only  of  those 
members  of  the  firm  who  actually  execute  the  in- 
strument. 


322  INDEMNITY   TO   SURETY. 

In  the  third  place,  the  indemnity  of  a  married  woman 
is  often  offered ;  and  in  about  half  the  States,  a  married 
woman  has  no  power  to  become  surety  or  guarantor  for 
another ;  and  her  indemnity  would  be  unenforceable.  The 
ruLe  in  each  State  on  this  subject  is  given  in  a  note.1 

The  indemnity  of  all  other  persons,  who  are  of  age  and 
of  sound  mind  would  ordinarily  be  valid. 


i ALABAMA. — Void  as  to  bond  on  behalf  of  husband  (Code  1907, 
Sec.  4497)  ;  and  a  mortgage  given  in  connection  with  such  a  bond 
would  be  void.  Osborne  vs.  Cooper,  113  Ala.,  405.  Valid  as  to  bond 
on  behalf  of  third  person. 

ARKANSAS— Void.     Collins  vs.  Underwood,  33  Ark.  265. 

CALIFORNIA — Valid  as  to  separate  property  (Civil  Code,  Sec.  158), 
but  not  as  to  community  property  unless  secured  by  pledge  or  mort- 
gage thereof  executed  by  the  husband.  Civil  Code,  Sec.  167  ;  Goad  vs. 
Moulton,  67  Cal.,  536. 

COLORADO— Valid.      Colo.    St.  Anno.,    Sec.   4191. 

DELAWARE — Valid.  Warder  vs.  Stewart,  16  Del.  (2  Marv.)  275; 
36  Atl.  88. 

DISTRICT  OF  COLUMBIA— Void.      Code,   Sec.  1155. 

FLORIDA — Void,  but  a  mortgage  on  her  separate  estate,  if  exe- 
cuted according  to  the  law  respecting  conveyances  by  married  women, 
would  be  valid.  Code  1906,  Sec.  2588  ;  Prentiss  vs.  Paisley,  25  Fla., 
927. 

GEORGIA — Contract  of  Suretyship  or  mortgage  to  secure  such  a 
contract  is  void  (Code,  Sec.  3007)  ;  but  she  may,  as  an  original  un- 
dertaker, become  liable  for  goods  furnished  to  another  from  which 
she  derives  no  benefit.  Freeman  vs.  Cole,  86  Ga.,  590  ;  12  S.  E.  1064. 
Perhaps  a  bond  will  be  construed  the  same  as  goods. 

ILLINOIS— Valid.     Rev.  St.  1912,  Ch,  68,  Sec.  6,  p.  1284. 

INDIANA— Void.     Burns  Anno.  St.,  Sec.  7859. 

IOWA— Valid.  Cod-e  1897,  Sec.  3164t  Low  vs.  Anderson,  41  Iowa 
476. 

KANSAS — Valid.     Harrington  vs.  Lowe.  73  Kan.  1. 

KENTUCKY— Void.      Carroll's   Statutes,    1909,   Sec.   2127. 

LOUISANA — 'Void  as  to  obligation  on  behalf  of  husband,  but  proba- 
bly valid  as  to  an  obligation  on  behalf  of  a  third  person,  if  executed 
with  consent  of  her  busband  or  the  judge.  Same  rule  as  to  a  mort- 
gage of  her  separate  property.  Hollingsworth  vs.  Spanier,  32  La. 
Ann.  203  ;  Berwick  vs.  Frere,  49  La.  Ann.  201. 

MAINE— Valid.     Mayo  vs.   Hutchinson,   57  Me.,  546. 

MARYLAND— Valid.     Code,  Art.  45,   Sec.  5. 

MASSACHUSETTS— Valid.  Rev.  Laws,  1902,  Ch.  158,  Sec.  2., 
Comm.  vs.  Abbott,  168  Mass.,  471.  Burney  vs.  Bank,  150.  Mass.  574. 
Major  vs.  Holmes,  124  Mass.  108. 

MICHIGAN— Void.  Russell  vs.  Bank  39  Mich.  671  ;  Fisk  vs. 
Mills,  104  Mich.  433. 

MINNESOTA— Valid  Rev.  Laws  1905,  Sec.  3607;  N.  W.  Ins.  Co. 
vs.  Allis.  23  Minn.  337.  King  vs.  Hansing,  93  N.  W.  307  (Minn) . 

MISSISSIPPI — Valid.     Code  1906,  Sec.  2517. 

MISSOURI— Valid.  Rev.  St.  1909,  Sec.  8304.  Grandy  vs.  Camp- 
bell, 78  Mo.  App.  502  ;  McCullum  vs.  Broughton  132  Mo.  601. 


INDEMNITY  TO  SURETY.  323 

Sec.  204. — The  Preparation  and  Execution  of 
Bonds  of  Indemnity.  It  may  not  be  out  of  place  here 
to  call  attention  to  the  importance  of  the  proper  prep- 
aration and  execution  of  such  bonds  of  indemnity.  A 
slight  error  may  render  the  bond  void,  as  they  are  gen- 
erally construed  by  the  courts  with  great  strictness. 


NEBRASKA — Mortgage  on  separate  real  estate  valid.  Watts  vs. 
Gantt,  42  Nebr.,  869 ;  Holmes  vs.  Hull,  50  Neb.,  656.  Indemnity 
bond  would  be  void  unless  it  appeared  by  some  express  words  or  act 
that  she  intended  to  bind  her  separate  estate.  Grand  vs.  Wright  53 
Nebr.,  574. 

NEW  HAMPSHIRE — Void  as  to  bond  on  behalf  of  husband  or  a 
firm  in  which  he  is  a  partner.  So  also  a  mortgage  on  her  separate 
real  estate  would  be  void.  Stokell  vs.  Kimball,  59  N.  H.,  13  ;  Buss 
vs.  Woodward,  60  N.  H.  58;  Storrs  vs.  Wingate,  67  N.  H.,  190. 
Valid  as  to  bonds  on  behalf  of  other  persons.  Parsons  vs.  McLane- 
64  N.  H.,  478. 

NEW  JERSEY— Void.  Comp.  Laws,  1910,  p.  3226,  Sec.  5.  Mort- 
gage on  her  separate  property  probably  valid.  Lomerson  vs.  John- 
ston, 44  N.  J.  Eq.,  93. 

NEW  YORK— nValid.  Bowery  Nat.  Bank  vs.  Sniffen,  7  N.  Y.  Supp. 
520. 

NORTH  CAROLINA — Valid  as  to  separate  personal  property,  if 
husband  joins  in  and  if  it  is  made  an  express  charge  against  her 
separate  estate  ;  void  as  to  separate  real  estate  unless  her  privy  ex- 
amination is  taken.  Thompson  vs.  Smith,  106  N.  C.  357  ;  Jones  vs. 
Craigniles,  114  N.  C.  613. 

NORTH  DAKOTA— ^Valid,     Re&  Codes  1899  Sec.  2767. 

OHIO — Valid.     Page  &  Adams  Code,  Sec.  7999. 

OREGON — Valid.  Lord's  Oregon  Laws,  Sees.  7049-50 ;  First  Nat. 
Bk.  vs.  Leonard,  36  Oregon,  390;  59  Pac.  873. 

PENNSYLVANIA — Void  P.  L.,  1893,  p.  344,  Sec.  2  ;  Purdon's  Di- 
gest (13th  Edt.)  p.  2451;  but  a  mortgage  on  her  separate  property 
would  be  valid.  Kuhn  vs.  Ogilvie,  178  Pa.  St.  303. 

RHODE  ISLAND— Valid.  General  Laws,  1909,  Ch.  246,  Sec.  3,  p. 
855. 

SOUTH  CAROLINA— Valid.     Code  1912,   Sed  3761  and  notes. 

SOUTH  DAKOTA— Valid.  Civil  Code  1913,  Sec.  98.  Colonial 
Mortgage  Co.  vs.  Bradley,  4  SI  Dak.,  158  ;  55  N.  W.  1108. 

TEXAS— Void.     Cruger  vs.  McCracken,  87  Tex.  584  ;  30  S.  W.  537. 

VERMONT — Void  as  to  bond  on  behalf  of  her  husband,  although  a 
mortgage,  joined  in  by  her  husband,  would  be  valid.  Indemnity  or 
mortgage  valid  when  given  on  a  bond  in  behalf  of  a  third  person. 
Putt.  St.  1906,  Sec.  3039.,  Reed  vs  Newcomb,  59  Vt.  630;  10  Atl. 
593. 

VIRGINIA— Valid.  Pollard's  Code  of  1904,  Sec.  2286a.  Young  vs. 
Hart,  101  Va.  480 ;  44  S.  E.  703. 

WASHINGTON— Valid.  Kittitas  vs.  Travers,  16  Wash.,  528;  48 
Pac.  340. 

WEST  VIRGINIA — Valid  as  to  the  wife's  separate  personal  prop- 
erty but  not  her  real  estate.  Code  1913,  Sec.  3680 ;  Dages  vs.  Lee. 
20  W.  V..  584;  Camden  vs.  Hiteshaw,  24  W.  Va.  236.  Mortgage  on 
real  estate,  if  properly  executed,  is  valid.  Code  1913,  Sec.  3671. 

WISCONSIN — Void.     Disabilities  of  the  Common  Law  not  removed. 
WYOMING — Valid.     Comp.  St.  1910,   Sec.  3909. 


324  INDEMNITY  TO  SURETY. 

Each  company  has  its  own  printed  forms;  and  the 
essential  thing  is  that  they  shall  be  properly  filled  out 
and  executed. 

First,  the  names  of  all  indemnitors  should  be  in- 
serted in  the  body  of  the  bond,  and  at  least  one  given 
name  (and  not  merely  the  initials)  of  each  indemnitor 
should  be  used. 

Second,  the  bond  of  the  surety  company,  on  ac- 
count of  which  the  indemnity  is  given,  should  be  accu- 
rately described;  that  is  to  say,  the  proper  date,  the 
correct  name  of  the  principal  and  of  the  obligee  should 
be  used.  It  is  not  so  important  to  give  a  detailed  de- 
scription of  the  bond,  as  that  what  is  given  shall  be 
accurate.  If  it  is  not,  the  courts  may  hold  that  the  in- 
demnity was  not  given  on  account  of  the  bond  in  ques- 
tion; the  effect  of  which  would  be  to  render  the  indem- 
nity void.  In  my  own  experience  I  have  had  cases 
where  liability  was  denied  on  account  of  very  slight 
errors  in  the  description  of  the  bond ;  and  in  such  cases, 
the  result  of  a  suit  is  always  doubtful. 

Third,  the  bond  of  indemnity  should  be  signed  by 
all  the  indemnitors:  and  they  should  sign  their  names 
just  as  they  appear  in  the  body  of  the  bond;  that  is, 
with  at  least  one  given  name  and  not  merely  initials. 

Fourth,  the  signatures  should  be  witnessed. 

Fifth,  the  instrument  should  be  acknowledged  be- 
fore a  notary  public  or  other  proper  officer. 

The  company  above  referred  to  as  having  made 
a  partial  examination  into  the  cause  of  its  losses  during 
the  year  1912,  found  that  more  than  $10,000.00  was 


INDEMNITY  TO   SURETY.  325 

attributable  to  the  ' '  acceptance  of  faulty  or  deficient  in- 
demnity agreements  or  neglect  to  complete  offered  in- 
demnity. "  It  will  be  seen  therefore  that  this  phase  of 
indemnity  agreements  cannot  with  safety  be  over- 
looked. 


INDEX 

A 

Sections. 

Ability  of  applicant  for  official  tbond  to  be  considered 26 

Ability  of  contractors,  to  be  considered 105 

Accident,  provision  should  be  made  to  relieve  surety  from 

consequences  of 116 

Accounting   by  fiduciaries 68 

Accounting  by  public  officials 32 

Accounting  by  applicants  for  fidelity  bonds 10 

Accounts,  liability  of  employee  for  uncollected 19 

Accounts   of  officers,  audits  of 33 

Accounts    receivable,  bond  on  assignment  of 141-145 

Accounts  receivable  in  financial  statement,  verification  of. .  107 

Acts  covered  by  fidelity  bonds 2 

Acts  in  excess  of  officers  authority,  surety's  liability  for. .  40 

Adequacy  of  contract  price 

Administrators  and  executors,  duties  of 42 

Administrator  as  applicant  for  bond  in  judicial  proceed- 
ings    98 

Administrators,  c.   t.    a 44 

Administrators,  d.  b.  n.  c.  t.  a 45 

Administrators,  de   bonis   non 43 

Administrators,  pendente  lite 46 

Administrators   to    sell    property 48 

Alcohol,  bond  for  withdrawal,   free  of  tax 170 

Alcohol,  manufacturers  bond  for  specially  denatured....  176 

Alcoholic  liquors,  use  of,  by  applicants,  effect  of 6 

American  rule  for  investments  by  fiduciaries 64 

Amount  of  depository  liability  to  be  carried  on  a  bank.. .  133 
Amount  of  money  to  be  handled  by  applicant  for  fidelity 

bond,  eflect  of 10 

Amount  of  money  to  be  handled  by  officer,  effect  of. ...  30 

Amount  of  work  contractor  has  on  hand,  effect  of 108 

Ancestry  of  an  applicant  for  a  fidelity  bond,  effect  of 5 

Animals,  bond  on  importation  of 193 

Annual  accountings  by  public  officer 32 

Annual  warehousing  bonds  of  distillers 164 

Antecedents  of  an  applicant  for  a  fidelity  bond,  effect  of . .  0 


328  INDEX. 

Sections. 

Appeal  bonds,  liability  of  surety  on 77 

Applicant  for  appointment  of  a  receiver,  bond  of 91 

Application  for  contract  bond,  effect  of  delay  in  making. .  117 
Application  of  surety  to  be  released  from  bond  of 

fiduciary 74 

Arrest,  bond  on  order  of 94 

Arrest  in  civil  action,  bond  to  secure 94 

Arrest  of  defaulting  employee  at  instance  of  employer ...  16 

Arrest  by  sheriff  or  marshal,  bond  to  secure 88 

Art,  bond  for  exhibition  of  works  of 194 

Asphalt  pavement,  maintenance  bond  on 119 

Asphaltic  macadam  pavement,  maintenance  bond  on 119 

Assets  of  bank,  character  of,  as  affecting  risk  on  depository 

bond 126-128 

Assets  in  hands  of  fiduciary,  joint  control  of  by 

surety 55,  58,  67,  72 

Assets  of  contractor,  verification  and  valuation  of 107 

Assets  of  estate,  conversion  of  into  proper  form 62 

Assets  of  estate,  duty  of  fiduciary  to  take  inventory  of 61 

Assets  of  estate,  duty  of  fiduciary  to  take  possession  of.  60 

Assigned  accounts  bonds 141-145 

Assignee  for  thie  benefit  of  creditors 51 

Assignment  of  accounts  receivable,  bond  on 141-145 

Assignment  of  lost  instrument  as  affecting  risk 139 

Attachment  bond  for  fiduciary 98 

Attachment  bond,  liability  under 79 

Attachment,  bond  to  dissolve 80 

Attorney  for  fiduciary,  standing  of,  as  affecting  risk 56 

Audit  of  accounts  of  public  officer 32-33 

Audit  of  accounts  of  officers  by  surety  companies 33 

Authority  of  applicant  for  fidelity  bond 10-12 

Authority  of  fiduciary,  acts  in  excess  of 71 

Audits  of  accounts  of  employees 12 

B 

Bail  bonds 95 

Bankrupt  and  insolvent  estates,  distribution  of 69 

Bankruptcy,   receivers   and  trustees   in 50,58 

Bank,  failure  of,  liability  of  officer  for  loss  by 35 

Bank  stock   as  investment 64 


INDEX.  329 

Sections. 

Bid  bonds 100-101 

Bidding  too  low  by  contractors 110 

Bids,  comparison  of,  important 110 

Bill  of  lading,  bond  to  produce 154 

Bills  payable,  as  affecting  risk  on  depository  bond 125 

Bitulithic  pavement,  maintenance  bond  on. 119 

Bituminous  concrete  pavement,  maintenance  bond  on....  119 

Bituminous  macadam  pavement,  maintenance  bond  on...  119 

Bond,   filing  of  new,   by  fiduciary 74 

Bond  for  cartmen,  draymen  and  lightermen 191 

Bond  for  central   denaturing   bonded   warehouse 173 

Bond  for  costs     78 

Bond  for  deportation    of    immigrants 161 

Bond  for  entry  or  withdrawal  of  materials  for  construc- 
tion   of    vessel 199 

Bond  for  examination  and  appraisement  of  machinery..  198 

Bond  for  exhibition  of  works  of   art 194 

Bond  for  exportation  of  distilled  spirits 108 

Bond  for  exportation  of  fermented   liquors    178 

Bond  for  exportation  of  imported  tea    187 

Bond  for  exportation  of  specific  merchandise 179 

Bond  for  injunction 81 

Bonds  for  insurance  companies  in  order  to  qualify 146 

Bond  for  payment  of  rent 153 

Bond  for  redelivery   of   merchandise  to   collector   of  cus- 
toms      192 

Bond  for  redelivery  of  unexaminied  packages 196 

Bond  for  storage   of   imported   tea 186 

Bond  for  transportation    and    exportation    of     imported 

merchandise    189 

Bond  for  warehouse 185 

Bond  for  withdrawal  of  alcohol  free  of  tax 170 

Bond  for  withdrawal  of  distilled  spirits  free  of  tax ....  169 

Bond  for  withdrawal  of  salt  for  curing  fish 199 

Bond  for  withdrawal  of  supplies     for     vessel     clearing 

coastwise     199 

Bond,    indemnity    on    lost 134-140 

Bond   of   carrier   for   transportation   of   merchandise   in 

bond     190 

Bond  of  indemnity  against  immigrant  becoming  a  public 

charge    162 


330  INDEX. 

Sections. 

Bond  of  legatee  to  pay  debts  of  testator 97 

Bond  of  mortgagor  to  make  improvements  on  mortgaged 

premises    157 

Bond  of  public  officers 20-40 

Bond   on   export   of   imported   merchandise  with   benefit 

of  drawback 197 

Bond  on  importation  of  certain  animals  for  exhibition..  193 

Bond  on  removal  of  a  case  from  one  court  to  another . .  93 

Bond  to  discharge  mechanic    lien    152 

Bond  to  dissolve  an  attachment 80 

Bond  to  indemnify  against  infringement  of  patent 155 

Bond  to  pay    freight    charges 154 

Bond  to  produce  certificate  of  exportation  of  American 

products    199 

Bond  to  produce  certificate  of  origin  of  merchandise  from 

Philippine  Islands 199 

Bond  to  produce  certified  invoice  199 

Bond    to   produce    declaration   of   absent   owner    of    im- 
ported   merchandise    199 

Bond  to  produce  declaration  of  foreign  exporter  of  do- 
mestic  products    199 

Bond  where   triplicate  invoice   is  wanting 199 

Bonded  merchandise,  bond  for  transportation  of 188 

Bonded  warehouse,  bond  of  proprietor  of 167 

Bonds  for    distillers 164 

Bonds,  municipal,  in  payment  of  contract  price,  effect  of.  Ill 

Bonds  of  corporations   as   investments 64 

Bonds  of  fiduciaries,    underwriting   of 54-74 

Bonds,   state  and  municipal  as   investments 64 

Borrowed  money,  as  affecting  risk  on  depository  bond . .  125 

Brewers'  bond  177 

Brick  pavement,  maintenance  bond  on 119 

Building,  bond  of  mortgagor  to  erect 157 

Burglary,  theft  or  larceny,  liability  of  officer  for  loss  of 

funds  by  37 

Business  of  decedent,  continuance  of,  by  administrator.  .42,  62 
Business,  continuance  of  by  receiver 49,  62 

c 

Cancellation  of  bonds  of   fiduciaries 74 

Cancellation  of  depository  bonds 132 


INDEX.  331 

Sections. 

Cancellation  of  fidelity  bonds  3 

Cancellation  of  official  bonds 22 

Capital  and  surplus  of  bank,  as  affecting  risk  on  de- 
pository bond  123 

Card  playing  by  applicant  for  fidelity  bond 6 

Care  of  trust  property  by  fiduciaries 65-6-7 

Carrier  for  transportation  of  merchandise  in  bond,  bond 

of  190 

Cartmen,  bond  for 191 

Cash  of  contractor,  verification  of 107 

Cash  reserve,  as  affecting  risk  on  depository  bonds.......  128 

Central  denaturing  bonded  warehouse,  bond  for 173 

Certificate  of  exportation  of  American  products,  bond  to 

produce 199 

Certificate  of  origin  of  merchandise  from  Philippines, 

bond  to  produce 199 

Certificates  of  deposit  as  borrowed  money,  in  financial 

statement  of  bank,  effect  of 125 

Certified  invoice,  bond  to  produce . .  199 

Character  of  contract,  as  affecting  risk  on  contractor's 

bond 109-117 

Chattels,  care  of  by  fiduciary 65-66 

Check,  indemnity  bond  on  lost 134-140 

Checks,  countersigning  for  fiduciary,  care  to  be  exercised  72 
Checks,  right  of  applicant  for  fidelity  bond  to  sign, 

effect  of , 11 

Checks  upon  public  officers,  as  affecting  risk . .  31 

Cigar  manufacturers'  bond 180 

Cigars,  bond  for  exportation  of,  free  of  tax 179 

City,  as  applicant  for  bond  in  judicial  proceedings 99 

City  bonds  as  investments 64 

City  funds,  risk  on  depository  bond  covering 131 

City  Marshals  exceeding  authority,  liability  of  surety  for  40 

Civil  actions,  bond  on  order  of  arrest  in 94 

Claims  against  estate,  payment  of,  by  fiduciaries....'..  63 

Clerks,  default  of,  liability  of  officer  for 36 

Clerks  of  courts,  neglect  of  duty  by 39 

Collateral  security  on  bail  bonds,  character  of 95 

Collateral  security  on  judicial  credit  guarantees 76 

Collection  of  debts  by  fiduciary 60 

Collection  of  note,  bond  on  injunction  against 81 


332  INDEX. 

Sections. 

Collectors,  opportunities  of,  to  commit  default 11 

Commingling  trust  estate  with  individual  property 66 

Commission,  employees  on,  as  affecting  risk 15-16 

Commissioners   to   sell  property . ./ 48 

Committee  of  the  estate  of  an  incompetent 53 

Comparison  of  'bids,  importance  of,  in  re-contract  bonds. .     110 
Compensation   of  employee   as  affecting  risk  on  fidelity 

bond 14 

Completion  of  contract  by  surety,  right  should  be  reserved    116 

Concealment  of  shortage  by  public  officer 32 

Concrete  pavements,  maintenance  bond  on 119 

Condition  in  fidelity  bond  requiring  employer  to  cause  ar- 
rest of  defaulting  employee 16 

Conditions  in  contract  bond,  limitation  of  liability  by . .     116 

Conditions  in  public  official  bonds 21 

Conservator  of  the  estate  of  an  incompetent 53 

Constables,  exceeding  authority,  liability  of  surety  for. . .       40 
Construction  of  vessel,  bond  for  withdrawal  of  materials 

for 199 

Continuance  of  business  by  administrator 42,  62 

Continuance  of  business  by  receiver 49,  62 

Contract   bonds    , 100-119 

Contract,  nature  of,  as  affecting  risk 109-117 

Contract  price,  adequacy    of 110 

Contract  price,  how  to   be  paid Ill 

Contract,  provisions  for  extension  of  time  to  complete...     112 

Contractors,  investigation  of 

Control  by  surety  of  assets  in  hands  of  fiduciary.  .55,  58,  67,  72 

Control  over  employers'  money  by  applicant 11 

Conversion  of  assets  into  proper  form  by  fiduciaries 62 

Convertibility  of  assets,   as  affecting  risk  in  depository 

bond    127 

Corporation,  indemnity  of 203 

Corrected  certified  invoice,  bond  to  produce 199 

Costs,  bond  for  payment  of 78 

Counsel  for  fiduciary,  standing  of,  as  affecting  risk 56 

Countersignature    of    checks    drawn    by    public     officers, 

effect    of 31 

County  as  applicant  for  bond  in  judicial  proceedings 99 

County  funds,  risk  on  depository  bond  for 131 

Countersigning  checks  for  fiduciary,  care  to  be  exercised      72 


INDEX.  333 

Sections. 

Court   bonds    (credit   guarantees) 75-99 

Credit  guarantees  in  judicial  proceedings 75-99 

Creditors,  bond  of  petitioning,  in  bankruptcy 92 

Curator   of   an   interdict 53 

Custom-house  bonds 183-198 

Custom-house  bonds,  power  of  attorney  to  execute 199 

Custom-house  brokers,  execution  of  bonds  by 199 


D 


Damages,  bond  of  grantee  of  a  franchise  to  pay 158 

Damages  for  delay  in  completing  contract 112 

Debt   due  by  fiduciary,  liability  of  surety  for 70 

Debts  due  by  applicant  for  fidelity  bond,  effect  of 7 

Debts  due  estate,  collection  of,  by  fiduciary 60 

Debts  of  estate,  payment  of,  by  fiduciaries 63 

Debt  of  testator,  bond  of  legatee  to  pay 97 

Decedent,  bond  on  sale  of  real  estate  of 96 

Decedent's  business,  continuance  of,  by  administrator. .  .42,  62 
Declaration  of   absent    owner    of  imported   merchandise, 

bond  to  produce i 

Declaration  of  foreign  exporter,  bond  to  produce 199 

Decrease  of  deposits,  as  affecting  risk  on  depository  bond.     124 

Defalcation  by  public  officers,  concealment  of 

Default  by  contractor,  rights  of  surety  in  event  of 116 

Defaulting  employe,  arrest  of,  at  instance  of  employer. . .       16 

Defaults  by  subordinates,  liability  of  ofiicer  for 36 

Delay  in  completing  contract,  provision  in  case  of 112 

Delayed  application  for  contract  bond ; 117 

Delivery  of  merchandise  in  the  future,  bond  for 118 

Delivery  of  merchandise  in  the  future  bond  to  pay  for. .     156 

Denatured  alcohol  bonds 171-176 

Denatured  alcohol,  manufacturers  bonds  for  specially 176 

Denaturing  warehouse  bond,  distillers 172 

Denaturing  warehouse,  bond  for  central 173 

Deportation  of  immigrants,  bond  for 161 

Depository  bonds 120-133 

Depository  liability  of  fiduciary 65-66-67 

Depository  liability  of  public  oflicers 35 

Depository  liability,  amount  of,  to  be  carried  on  a  bank . .     133 


334  INDEX. 

Sections. 

Depository,  release  of  surety  on  bond  of 132 

Deposits  of  bank,  as  effecting  risk  on  depository  bond. . . .  124 

Deputy,  default  of,  liability  of  officers  for 36 

Destruction  of  building  during  construction,  provision 

should  be  made , 113, 116 

Disbursing  Officers,  opportunities  of 11 

Discharge  mechanics'  lien,  bond  to 152 

Dissolve  attachment,  bond  to 80 

Dissolve  injunction,  bond  to 82 

Distraint,  bond  to  release. 86 

Distraint  for  rent,  bond  on 85 

Distributees  of  estates,  ascertainment  of 69 

Distribution  of  estates  of  deceased  persons 69 

Distribution  of  estates  of  minors  69 

Distribution  by  fiduciaries 69 

Distilled  spirits,  bond  for  exportation  of 168 

Distilled  spirits,  bond  for  withdrawal  of  free  of  tax ....  169 

Distillers  bonds i 164 

Distillers  bond,  industrial 174 

Distillers  denaturing  warehouse  bond 172 

Distillers  of  fruit  brandy,  bond  of >  165 

Distillers  warehousing  bond 164 

Dividends,  right  to,  effect  of,  on  depository  bond 131 

Drainage  of  street,  effect  of,  on  maintenance  guarantee 

of  paving  119 

Draw  on  employer,  right  of  applicant  to 11 

Draymen,  bond  for 191 

Drinking  by  applicant  for  fidelity  bond 6 

Drinking  by  contractors,  effect  of 104 

Duties  of  applicant  for  official  bond 28 

Duties  of  fiduciaries  59-69 

Duties,  performance  of,  toy  public  officers 26 

Duty,  neglect  of,  by  officers,  effect  of 39 


E 


Earnings  of  employee  as  affecting  risk 14 

Earthquake,  provision  should  be  made  to  relieve  surety 

from  damages  by 116 

Efficiency   guarantees    119 

Efficiency  of  applicant  for  official  bond 26 


INDEX.  335 

Sections. 
Employer's    money,   extent    of   applicant's   control  over, 

effect   of 11 

Employers,  replies  of  former  in  re  fidelity  applications . .  8 

Employer's  statement,  effect  of,  and  necessity  for 9 

Employment  record  of,  in  re  fidelity  applications.. 8 

Endorsement   of    lost   instrument,    as    affecting    risk    of 

surety 139 

Environment   of   an    applicant    for    a    fidelity    bond,    as 

affecting  risk   5 

Equipment  of  contractors,  ias  affecting  risk  of  surety 106 

Erection  of  public  utility,  bond  for 158 

Estate  of  iminors,  order  of  court  to  allow  use  of . . 52 

Estimates  by  small  contractors 105 

Evasion  by  fidelity  references 8 

Examination  and  appraisement  of  machinery,  bond  for. .  198 

Examination  of  accounts  of  public  officers 33 

Examination  of  banks  applying  for  depository  bonds . .  126,  129 
Exceeding  authority,  liability  of  surety  in  case  of  public 

officer 40 

Exceeding  authority,  liability  of  surety  in  case  of  fidu- 
ciary   71 

Exclusive  control  of  money  by  fiduciary,  importance  of. .  67 

Execution  of  indemnity  bonds  in  favor  of  surety 204 

Executors  and  administrators,  duties  of 42 

Exhibition  of  works  of  art,  bond  for 194 

Experience  of  contractors  as  affecting  risk  of  surety 105 

Exportation  of  distilled  spirits,  bond  for 168 

Exportation  of  fermented  liquors,  bond  for 178 

Exportation  of  impure  tea,  bond  for 187 

Exportation  of  merchandise,  bond  for 179 

Exportation  of  imported  merchandise,  bond  for 192 

Exportation  of  imported  merchandise,  bond  on 197 

Extension  of  time  to  complete  contract,  provision  for..  112-113 

Extravagance  by  an  applicant  for  fidelity  bond 6 

P 

Failure   of  bank,   liability   of  public  officer   for   loss  of 

public  funds  by 35 

Failure  of  fiduciary  to  pay  premium,  effect  of 74 

Fast  living  by  applicant  for  fidelity  bond,  effect  of 6 


336  INDEX. 

Sections. 

Fear  of  punishment  as  affecting  risk 16 

Fermented  liquors,  bond  for  exportation  of 178 

Fidelity  bonds   , 1-19 

Fidelity  bonds,  acts  covered  by 2 

Fidelity  bonds,  cancellation  of 3 

Fidelity  bonds,  liability  under 2 

Fidelity  references,  consideration  of 8 

Fiduciaries,    as    applicants    for   bonds    in     judicial    pro- 
ceedings        98 

Fiduciaries,   distribution  by 69 

Fiduciaries,  investigation  of,  before  executing  bonds 1. .     55 

Fiduciaries,  liability  on  bonds  of 41-74 

Fiduciaries,  release  of  surety  on  bond  of 74 

Fiduciaries,  underwriting  the  bonds  of .54-74 

Fiduciaries,  who  are 41 

Financial  condition  of  applicant  for  fidelity  bond 7 

Financial    condition   of   bank    as   affecting   risk    on    de- 
pository bond   121-128 

Financial  guarantees  in  judicial  proceedings 75-99 

Financial  resources  of  applicant  for  official  bond 27 

Financial  resources  of  contractor 107 

Financial  resources  of  parents  or  relatives  of  applicant 

for  fidelity  bond 7 

Financial  statement  of  contractor,  verification  of 107 

Fire  Insurance  Companies,  qualifying  bonds  for. 146-150 

Fire  Insurance,  duty  of  contractor  to  carry ,    113 

Fire,  provision  should  be   made  to   relieve  surety  from 

damage  by 116 

Foreign  exporter,  bond  to  produce  declaration  of 199 

Foreigners  as  applicants  for  fidelity  bonds 5 

Form  of  public  official  bonds 21 

Former  employers,  replies  of,  in  re  fidelity  applications. .         8 
Foundation   of    pavement,    effect   of    in    re    maintenance 

guarantee 119 

Franchise  bonds 158 

Freight  bonds 154 

Fruit  distillers'  bonds 165 

Funds  of  estate,  how  to  be  deposited  by  fiduciary 65-66-67 

Funds,  loss  of,  by  burglary,  liability  of  public  officers  for.       37 

Future  delivery  of  merchandise,  bond  for. ., 118 

Future  delivery  of  merchandise,  bond  to  pay  for 156 


INDEX.  337 

G 

Sections. 

Gambling  by  an  aplicant  for  fidelity  bond,  effect  of .......  6 

General  bonded  warehouse,  bond  of  proprietor  of . .  167 

General  special  lay  order  bond 195 

Government  bonds  as  investments , 64 

Government  property,  right  to  file  lien  on 115 

Granite  block  pavement,  maintenance  bond  on 119 

Guarantee  of  efficiency  and  maintenance 119 

Guardian  to  sell  property,  bond  of :.........  48 

Guardians  and  tutors  of  minors,  bonds  of . .- 52 

H 

Habits  of  an  applicant  for  fidelity  bond •  6 

Holdover  public  officers,  liability  of  surety  for 34 

Honesty  of  applicant  for  official  bond,  investigation  of. .  .24-25 

Honesty  of  contractor,  investigation  of 104 

I 

Immigrant,   bond  of  indemnity   against   becoming  public 

charge    162 

Immigrant,  bond  for  deportation  of i < 161 

Importation  of  animals  for  exhibition,  bond  on 193 

Imported  merchandise,  bond  on  export  of,  with  benefit  of 

drawback     • 197 

Imported  tea,  bond  for  storage  of > 186 

Importer,  execution  of  bonds  on  behalf  of  surety,  by. ...  199 

Imprisonment  of  defaulting  employee,  effect  of 16 

Improvements,  bond  of  mortgagor  to  make 157 

Impure  tea,  bond  for  exportation  of ;.. ••    187 

Inadequate  compensation  as  affecting  risk  on  fidelity  bond  14 
Income  of  estates  of  minors,  order  of  court  to  allow  use 

of i. . .  52 

Increase  of  deposits  of  a  bank,  as  affecting  risk  on  de- 
pository bond   , 124 

Indebtedness  due  by  applicant  for  fidelity  bond,  effect  of.  7 

Indebtedness  of  fiduciary  to  estate,  liability  of  surety  for.  70 
Indefinite  compensation  of  employee  as  affecting  risk  on 

fidelity   bond    15 

Indemnity  bond  to  surety,  preparation  and  execution  of.  204 


338  INDEX. 

Sections. 

Indemnity  bond  to  surety,  enforecability  of ( 203 

Indemnity  bond  to  Sheriff  or  Marshal 87-88 

Indemnity  bond  to  surety ,    200 

Indemnity  on  lost  instruments 134-140 

Indemnity  to  surety ; 200-204 

Indemnity  to  surety  toy  corporation    203 

Indemnity  to  surety  by  tmarried    woman 203 

Indemnity  to  surety  by  partnership    203 

Indemnity,  unreliability  of  personal 201 

Industrial   distillers'   bond , 174 

Inefficiency  of  applicant  for  official  bond,  effect  of 26 

Infringement  of  patent,  bond  to  indemnify  against. 155 

Injunction  bond  for  fiduciary. 98 

Injunction  bond,  liability  under , 81 

Injunction,  bond  to  dissolve  or  release 82 

Injuries,  liability  of  surety  on  contract  bond  for  personal     114 

Insolvent  estates,  distribution  of —       69 

Insurance  against  fire,  duty  of  contractor  to  carry 113 

Insurance,  duty  of  contractor  to  carry  liability 114 

Insurance  companies,  qualifying  bonds  for 146-150 

Insurance  policies,  indemnity  on  lost i 134-140 

Interest  in  partnership,  duty  of  fiduciary  to  sell 62 

Interest  on  public  funds,  liability  of  public  officer  for. ...       38 

Internal  Revenue  bonds 163-182 

Inventory  of  assets,  filing  of    by  fiduciaries 61 

Investments  by  executors  and  administrators  of  funds  of 

estate 42 

Invetments  by  fiduciaries 64 

Investments  of  bank  as  effecting  risk  on  depository  bond.     129 

Investigation  of  applicant  for  official  bond 25 

Investigation  of  contractors 104 

Investigation    of    fiduciaries \ 55 

Investigation  of  applicants  for  fidelity  bonds 8 

Invoice,   bond   to  produce  triplicate 199 

J 

Joint  control  by  surety  of  assets  in  hands  of  fiduciary . . 

55,  58,  67,  72 

Joint  control,  effect  of 67 

Joint  control,  care  to  be  used  in  exercising 72 


INDEX.  339 

Sections. 

Judicial  bonds   (credit  guarantees) 75-99 

Judgment,  bond  on  injunction  against  collection  of 81 

L 

Labor  and  materials,  liability  of  surety  on  contract  bond 

for 115 

Larceny,  liability  of  public  officer  for  loss  of  funds  by. . .  37 

Lay  order  bonds. . .. . ., 195 

Leasehold  estates,  duty  of  fiduciaries  to  sell 62 

Legatee,  bond  of,  to  pay  debt  of  testator u . . «  97 

Liability,  depository,  amount  of,  to  be  carried  on  a  bank. .  133 

Liability  of  employee  for  stock  shortage 18 

Liability  of  fiduciary  for  loss  by  bank  failure 65-66-67 

Liability  insurance,  duty  of  contractor  to  carry 114 

Liability  of  employee  for  uncollected  accounts,  effect  of . .  19 

Liability  of  officers  for  loss  by  bank  failure ,. . .  35 

Liability  of  public  officers,  as  affecting  risk  of  surety.  .29,  35-40 

Liability  under  contract  bonds 103 

Liability  under  contract  bonds,  limitation  of,  by  condi- 
tions in  bond 116 

Liability  under  depository  bonds 120 

Liability  under  fidelity  bonds .  .1 2 

Liability  under  public  official  bonds 21 

Liability  of  employees,  as  affecting  risk  of  surety. 17-19 

Liability  of  fiduciaries «. ,.70-71 

Libel,  bond  to  secure  release  of 90 

Libellants'  bond  in  Admiralty ( 89 

License  or  permit  bonds.  .1 159 

Lien,  bond  to  discharge  mechanic's 152 

Liens,  bond  of  mortgagor  to  pay 157 

Liens,  liability  of  surety  on  contract  bond  for 115 

Life  insurance  companies,  qualifying  bond  for.  .1 146-150 

Lighterman,   bond   for 191 

Lightning,    provision    should  be  made   to   relieve  surety 

from  damage  by 116 

Limiting  liability  by  conditions  in  public  official  bonds. . .  21 

Limitation  of  liability  by  conditions  in  contract  bond....  116 

Liquid  assets,  as  affecting  risk  on  depository  bond 127 

Liquidated  damages  in  contract,  provision  for 112 

Liquors,  use  of  alcoholic,  by  applicant  for  fidelity  bond . .  6 


340  INDEX. 

Sections. 

Loading  of  vessels  at  night,  bond  for 195 

Loans  of  bank,  as  affecting  risk  on  depository  bond 129 

Loans  on  personal  security,  as  investments. 64 

Loans  on  personal  security,  fiduciary  not  to  make 62 

Loss  of  funds  by  burglary,  liability  of  public  officers  for. .,      3"? 
Lost  instruments,  indemnity  bonds  upon  issuance  of  du- 
plicate  134-140 

Low  bids  by  contractors,  effect  of 110 

Lower  classes  as  applicant  for  fidelity  bonds 5 


M 


Machinery,  bond  for  examination  and  appraisement  of . . .  198 

Machinery,  etc.,  contractors  should  have 106 

Maintenance  bonds 119 

Management  of  bank,  as  affecting  risk  on  depository  bond  129 

Manufacturers'  bond  for  specially  denatured  alcohol 176 

Married  woman's  indemnity 203 

Marshal,  bond  to  indemnify 87-88-89 

Marshal,  liability  of  surety  for  act  in  excess  of  authority.  40 

Massachusetts  rule  for  investments  by  fiduciaries 64 

Material  dealers,  references  from,  on  contractors 104 

Materials  for  construction  or  repair  of  vessel,  bond  for 

withdrawal  of 199 

Materials,  liability  of  surety  on  contract  bond  for 115 

Maturity  of  lost  instrument,  as  affecting  risk 139 

Maximum  cost,  effect  of  guarantee  as  to <. .  110 

Mechanics'  liens,  bond  of  .mortgagor  to  pay 157 

Mechanics'  lien,  bond  to  discharge 152 

Mechanics'  lien,  liability  of  surety  on  contract  bond  for. .  115 

Merchandise,  bond  to  pay  for  future  delivery  of 156 

Merchandise  in  bond,  bond  for  transportation  of 188 

Money,  amount  of,  contractor  should  have. .(. . ., 107 

Money,  amount  to  be  handled  by  applicant  for  fidelity 

bond  10 

Money,  bond  to  guarantee  repayment  of .......  160 

Money,  loss  of  by  burglary,  liability  of  officers  for. 37 

Money  of  estate,  how  to  be  kept  by  fiduciary 65-66-67 

Money  of  employer,  extent  of  applicant's  control  over. ...  11 
Money,  ownership  of,  by  applicant  for  fidelity  bond  or 

by  his  parents . . . 7 


INDEX.  341 

Sections. 

Money  to  be  handled  by  officer,  effect  of v 30 

Monthly  warehousing  bonds  of  distillers 164 

Mortgagee  bonds   i 157 

Mortgage,  bond  on  injunction  against  collection  of. . . 81 

Mortgage  on  real  estate,  as  an  investment  for  fiduciaries.  64 

Mortgagor,  bond  of,  to  make  improvements  or  pay  liens. .  157 

Municipal  bonds  as  investments  for  fiduciaries 64 

Municipal  property,  right  to  file  liens  on 115 

Municipalities   as  applicants  for  bonds  in  judicial  pro- 
ceedings   99 

N 

Nature  of  contract  as  affecting  risk  of  surety. 109-117 

Neglect  of  duty  by  officers,  effect  of 39 

Negroes,  as  applicant  for  fidelity  bonds. 5 

New  York  rule  for  investments  by  fiduciaries 64 

New  York  rule  regarding  mechanics'  liens \ 115 

Night  bonds   195 

Note,  indemnity  bond  on  lost , 134-140 

New  bond,  filing  of,  by  fiduciary , 74 

Notes,  promissory,  as  investments ,. . . .       64 

Note,  bond  on  injunction  against  collection  of  promissory.       81 

0 

Officers  of  bank,  character  of,  as  affecting  risk  on  de- 
pository bond 129 

Official  bonds 20-40 

Official  bonds,  depository  liability  under 35 

Official  duty,  neglect  of,  by  officer,  effect  of 39 

Opportunities  of  an  applicant  for  fidelity  bond  to  commit 

a  breach dO-12 

Opportunities  of  fiduciaries  to  convert  estate 58 

Opportunities  of  public  officer  to  commit  a  breach  of  his 

bond    29-34 

Opportunities  of  officers  to  conceal  shortage 32 

Opportunity  of  principal   in   assigned   accounts  bond  to 

commit  default   i 142 

Order  of  arrest,  bond  on 94 


342  INDEX. 


Sections. 

Partnership,  indemnity  of 203 

Past  record  of  an  applicant  for  fidelity  bond,  investigation 

of    , 8 

Patent  infringement  bonds 155 

Pavements,  maintenance  bonds  on  street 119 

Payment  of  debts  of  estate  by  fiduciaries 63 

Payment,  unauthorized,   by  fiduciary,  liability  of  surety 

for , 71 

Payment  for  merchandise,  bond  to  guarantee 156 

Payment  of  contract  price Ill 

Payment  of  premium,  failure  of  fiduciary  to  make,  effect 

of 74 

Payment  of  rent,  bond  for 153 

Penalty  for  delay  in  completing  contract 112 

Pennsylvania  rule  regarding  mechanics'  liens |  115 

Percentage  contract,  liability  of  surety  for  performance  of  110 

Performance  of  duties  by  officers,  liability  of  surety  for.  26 

Periodical  accounting  by  fiduciaries 68 

Periodical  audit  of  accounts  of  employees. ., 12 

Permit  bonds  ,. 159 

Personal  indemnity  to  surety 200-204 

Personal  indemnity,  unreliability  of 201 

Personal  injuries,  liability  of  surety  on  contract  bond  for  114 

Personal  property,  care  of,  by  fiduciary 65-66 

Personal  security,  duty  of  fiduciary  to  collect  loans  on. . .  62 

Petition  of  surety  to  be  released  from  bond  of  fiduciary . .  74 

Petitioning  creditors  in  bankruptcy,  bond  of 92 

Plant  iand  equipment  of  contractors ,. . .. 106 

Position,  nature  of,  to  be  occupied  by  applicant  for  fi- 
delity bond  9 

Possession  of  trust  property,  duty  of  fiduciary  to  take ...  60 

Power  of  fiduciary,  acts  in  excess  of < 71 

Preferred  creditor,  risk  in  case  obligee  in  depository  bond 

is 131 

Preliminary  or  bid  bond. \ 100-101 

Premium,    failure   of   fiduciary   to  pay,    effect   of,    upon 

surety's  liability 74 

Premium  on  assigned  account  bond,  lamount  of 141 

Preparation  and  execution  of  indemnity  bond  to  surety.  .1  204 

Price,  adequacy  of  contract,  effect  of 110 


INDEX.  343 

Sections. 

Price,  contract,  how  to  be  paid . Ill 

Property  of  applicant  for  official  bond,  quantity  of,  as 

affecting  risk 27 

Property  of  contractor,  quantity  of,  as  affecting  risk.....  107 

Prosecution  of  employees,  fear  of,  as  affecting  risk 16 

Provisional  seizure,  bond  for 79 

Punishment  of  defaulters,  fear  of,  as  affecting  risk. . 16 

Public  charge,  bond  of  indemnity  lagainst  immigrant  be- 
coming   162 

Public  officers,  audit  of  accounts  of 33 

Public  officers  holding  over  for  second  term,  bond  of ......  34 

Public  official  bonds 20-40 

Public  official  bonds,  cancellation  of,  during  term 20 

Public  official  bonds,  depository  liability  under..... 35 

Public  official  bonds,  liability  under i ». .  21 

Public  property,  right  to  file  liens  on. 115 

Public  utility,  bond  for  erection  of , 158 

Q 

Qualifications  of  applicant  for  official  bond ; 26 

Qualifying  bonds  for  insurance  companies 146-150 

B 

Railroad  stocks,  as  investments  for  fiduciaries 64 

Real  estate,  care  of,  by  fiduciary 65-66 

Real  estate  of  contractor,  verification  of 107 

Real  estate  of  decedent,  bond  on  sale  of 96 

Receipts  of  officers,  effect  of  inability  to  check  accurately  33 

Receiver  as  applicant  for  bond  in  judicial  proceedings. ... .  98 

Receiver,  bond  of  applicant  for  (appointment  of 91 

Receivers 49 

Receivers  in  bankruptcy. 50,  58 

Record  of  an  (applicant  for  fidelity  bond .; 8 

Record  of  applicant  for  official  bond , 25 

Record  of  contractors 104 

Recorders  of  deeds,  neglect  of  duty  by 39 

Re-delivery  bond  in  replevin 84 

Re-delivery  of  merchandise  to  Collector  of  Customs,  bond 

for    .  192 


344  INDEX. 

Sections. 

Re-delivery  of  unexamined  packages,  bond  for 196 

References  from  material  dealers,  unreliability  of 104 

References  of  applicant  for  official  bond 25 

References,  effect  of  replies  of,  upon  fidelity  applications.  8 

Refunding  bonds 160 

Release  attachment  bond . . . 80 

Release  injunction  bond / i. . . .  82 

Release  of  depository  liability,  effect  of  right  to  procure.  132 

Release  of  distraint,  bond  for 86 

Release  of  liability  under  official  bonds i. . .  22 

Release  of  libel,  bond  to  secure 90 

Release  of  mechanics'  lien,  bond  for. 152 

Release  of  property  by  Sheriff  or  Marshal,  bond  to  secure  87 

Release  of  replevin,  bond  for.  .i 84 

Release  of  surety  on  bond  of  fiduciary 74 

Release  of  surety  on  bond  of  public  officer 22 

Release  of  surety  on  depository  bond 132 

Release  of  vessel  from  seizure,  bond  to  secure i. .  90 

Removal  bonds   , , 93 

Rent,  bond  on  distraint  for 85 

Rent  bonds 153 

Repair  of  vessels,  bond  for  withdrawal  of  materials  for..  199 

Repayment  of  money  received,  bond  for 160 

Replevin  bond  for  fiduciary,  risk  of  surety  on 98 

Replevin  bond,  liability  under 83-84 

Replies  of  references,  effect  of,  upon  fidelity  applications.  8 

Reports,  duty  of  fiduciary  to  make  annual. 65 

Representations  by  employer  in  re  fidelity  bonds i  9 

Reserve  in  cash,  as  affecting  risk  on  depository  bond 128 

Resources,  financial,  of  applicant  for  official  bond 27 

Retained  percentage  on  contracts,  effect  of Ill 

Retorno  habendo  bond 84 

Right  to  salvage,  effect  of,  on  depository  bonds i.'.  131 

S 

Salary  of  employee,  amount  of,  as  (affecting  risk 14 

Sale  of  property  by  fiduciary  without  authority,  liability 

of  surety  for » 71 

Sale  of  property  by  trustee  or  guardian 48 

Sale  of  real  estate  of  decedent,  bond  on 96 


INDEX.  345 

Sections. 

Salesmen,  opportunities  of,  to  convert  employer's  money. .  11 

Salt  for  curing  fish,  bond  for  withdrawal  of 199 

Salvage,  right  to,  effect  upon  risk  of  surety  on  depository 

bond 131 

Second  mortgages  as  investments  for  fiduciaries ,.  64 

Second  term  of  public  officers,  liability  of  surety. 34 

Securities  of  estate,  how  to  be  kept  by  fiduciary 65-66 

Security  on  judicial  credit  guarantees 76 

Seizure,  bond  for  provisional 79 

Seizure  of  property  by  sheriff  or  marshal,  bond  to  secure. 88-89 

Separation  of  trust  estate  from  individual  property 66 

Sheriff,  bond  to  indemnify i , 87-88 

Sheriffs,  exceeding  authority,  liability  of  surety  for 40 

Ship,  bond  to  secure  seizure  of,  by  Marshal 89 

Shortage,  concealment  of,  by  public  officers 32 

Shortage  in  stock,  liability  of  employee  for 18 

Signing  checks  by  applicant  for  fidelity  bond 11 

Six  months  (bonds  in  custom-house  matters 195-196 

Slow  assets,  as  affecting  risk  on  depository  bond 127 

Small  contractors,  risk  of  surety  for 105 

Snuff,  bond  for  exportation  of,  free  of  tax ,. .  179 

Special  administrators   46 

Special  bonded  warehouse,  bond  of  proprietor  of 167 

Special  lay  order  bond 195 

Speculating  by  an  applicant  for  fidelity  bond,  effect  of . . .  6 

Speculative  investments,  duty  of  fiduciary  to  sell 62 

State  bonds  as  investments  for  fiduciaries 64 

State  funds,  depository  bond  covering 131 

State  property,  right  to  file  lien  on 115 

Statement,  financial,  of  contractor,  verification  of 107 

Statement  of  employer,  effect  of  and  necessity  for 9 

Steamships,  bonds  for  loading  of,  at  night 195 

Stipulation  for  value. 90 

Stock  in  mining  companies,  duty  of  fiduciary  to  sell 62 

Stock  shortage,  liability  of  employee  for 18 

Stocks  and  bonds  of  contractor,  verification  of 107 

Stocks  and  bonds  of  estate,  how  to  be  kept  by  fiduciary.  .  .65-66 
Stocks  of  business  corporations,  as  investments  for  fidu- 
ciaries   64 

Stone  block  pavement,  maintenance  bond  on 119 

Storage  of  imported  tea,  bond  for 186 


346  INDEX. 

Sections. 

Storeroom  bond,  transportation  and 175 

Street  paving,  maintenance  bond  on 119 

Strikes,  provision  should  be  made  to  relieve  surety  from 

damage  as  a  result  of 116 

Specially  denatured  alcohol,  manufacturer's  bond  for 176 

Subordinates,  default  of,  liability  of  public  officer  for 36 

Substituted  surety,  liability  in  case  of 73 

Supersedeas  bonds,  liability  of  surety  on 77 

Supplies  for  vessels  clearing  coastwise,   bond   for  with- 
drawal of 199 

Supply  contract  bonds i 118 

Surety,  indemnity  bonds  to. 200-204 

Surety,  for  fiduciary,  liability  of  substituted 73 

Surplus  of  bank,  as  affecting  risk  on  depository  bond... 

123,  126,  129 

T 

Tax  collectors,  annual   accounting   by 32-33 

Tax-collectors,  failure  to  collect  taxes , 39 

Tax  collectors,  risk  where  they  handle  two  or  more  funds. 32-33 

Tea,  bond  for  storage  of  imported. . 186 

Teams,  etc.,  contractors  should  have | 106 

Temporary  or  special  administrators 46 

Temptations  of  employees,  effect  of,  upon  risk  of  surety.  .13-16 

Temptation  of  principal  in  assigned  accounts  bond 143 

Temptation  of  public  officers  as  affecting  risk. . 29-34 

Ten-day  bond 196 

Termination  of  liability  of  surety  for  fiduciary 74 

Termination  of  liability  on  depository  bonds 132 

Termination  of  liability  under  fidelity  bond 3 

Termination  of  liability  under  official  bonds 22 

Theatrical   exhibit  bonds 193,    199 

Theft,  liability  of  officer  for  loss  of  money  by 37 

Time  for  completion  of  contract,  extension  of 112-113 

Tobacco,  bond  for  exportation  of,  free  of  tax.  .> 179 

Tobacco   manufacturers'   bond 181 

Tobacco  peddlers'  bond 182 

"Topeka"  pavement,  maintenance  bond  on..< 119 

Tornado,  provision  should  be  made  to  relieve  surety  from 
daimage  by   116 


INDEX.  347 

Sections. 

Transportation  bond  » 188 

Transportation  and  exportation,  bond  for 189 

Transportation  and  storeroom  bond 175 

Transportation  and  warehousing  bond  of  distiller  of 

spirits  > 166 

Transportation  of  merchandise  in  bond,  bond  of  carrier 

for  190 

Transportation  and  warehousing  bond  of  fruit  distiller. . .  165 

Traveling  men,  opportunities  of . ., 11 

Triplicate  invoice,  bond  to  produce i 199 

Trustee  as  applicant  for  bond  in  judicial  proceedings 98 

Trustees i .47-48 

Trustees  in  bankruptcy 50,  58 

Tutors  of  minors \ 52 


Unauthorized  payment  by  fiduciary,  liability  of  surety  for  71 

Uncertain  compensation  as  affecting  risk  on  fidelity  bond.  15 

Uncollected  accounts,  effect  of  liability  of  employee  for. .  19 

Underwriting  of  contract  bonds 102-117 

Underwriting  of  judicial  credit  guarantees 76 

Underwriting  of  public  official  bonds i 23-40 

Undivided  estate,  duty  of  fiduciaries  to  sell 62 

Unexamined  packages,  bond  for  redelivery  of 196 

Unit  price  for  contract,  effect  of  ..-...• 110 

Unloading  vessels  at  night,  bond  for 195 

Unproductive  property,  duty  of  fiduciary  to  sell 62 

V 

Vacant  land,  duty  of  fiduciary  to  sell , 62 

Valuation  of  assets  of  contractor i 107 

Value,  stipulation  for u.  90 

Varying  compensation  as  affecting  risk  on  fidelity  bond.  .  15 

Verification  of  financial  statement  of  contractor 107 

Verification  of  cash  on  hand  and  outstanding  in  re  public 

officers 12 

Vessel,  bond  to  secure  seizure  of,  by  Marshal 89 

Vessels,  bond  for  loading  of,  at  night 195 

Vitrified  brick  pavement,  maintenance  bond  on 119 


348  INDEX. 

w 

Sections. 

Warehouse,  bond  for 185 

Warehouse,  bond  of  proprietor  of  general  or  special 167 

Warehousing  bond  ....... 184 

Warrant  for  arrest  of  defaulting  employee 16 

Warranties  by  employer  in  re  fidelity  bonds 9 

Wasting  investments,  duty  of  fiduciary  to  sell. ,( 62 

Withdrawal  of  alcohol  free  of  tax,  bond  for 170 

Withdrawal  of  distilled  spirits,  free  of  tax,  bond  for 169 

Withdrawal  of  salt  for  curing  fish,  bond  for 199 

Wood  block  pavement,  maintenance  bond  on 119 

Work  on  hand  by  contractors 108 

Works  of  art,  bond  for  exhibition  of 194 

Worth  of  applicant  for  oflicial  bond 27 


AN  INITIAL  FIN1  TQ  RE_U_ 

OVERDUE. 


YC  23528 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


